FREEDOM HOLDING CORP.
10-Qs and 10-Ks
PROXIES
|
|
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☑
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the
quarterly period ended
December 31,
2019
OR
☐
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the
transition period from ________ to _________
Commission
File Number
001-33034
FREEDOM HOLDING CORP.
(Exact
name of registrant as specified in its charter)
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Nevada
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30-0233726
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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“Esentai Tower” BC, Floor 7
77/7 Al Farabi Ave
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Almaty, Kazakhstan
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050040
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(Address
of principal executive offices)
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(Zip
Code)
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+7 727 311 10 64
(Registrant's
telephone number, including area code)
Securities
registered under Section 12(b) of the Act:
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Title
of each class
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Trading
Symbol(s)
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Name of
each exchange on which registered
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Common
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FRHC
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The Nasdaq Capital Market
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Indicate
by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for
the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes ☒ No
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of
“large accelerated filer”, “accelerated
filer” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act. (Check one):
|
Large
accelerated filer
|
☐
|
Accelerated
filer
|
☒
|
|
Non-accelerated
filer
|
☐
|
Smaller
reporting company
|
☒
|
|
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|
Emerging
growth company
|
☐
|
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act.) Yes ☐ No
☒
As of February 10, 2020, the registrant had 58,343,212 shares of
common stock, par value $0.001, issued and
outstanding.
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FREEDOM HOLDING CORP.
FORM 10-Q
TABLE OF CONTENTS
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PART I
— FINANCIAL INFORMATION
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Page
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PART II
— OTHER INFORMATION
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FREEDOM HOLDING CORP.
CONDENSED
CONSOLIDATED
B
ALANCE SHEETS
(
Unaudited
)
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
December 31,
2019
|
March 31,
2019
|
|
ASSETS
|
|
|
|
Cash
and cash equivalents
|
$
93,653
|
$
49,960
|
|
Restricted
cash
|
49,726
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38,460
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Trading
securities
|
164,145
|
167,949
|
|
Available-for-sale
securities, at fair value
|
7,483
|
2
|
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Brokerage
and other receivables, net
|
157,217
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73,836
|
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Loans
issued
|
10,775
|
2,525
|
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Deferred
tax assets
|
281
|
1,265
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Derivative
assets
|
242
|
-
|
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Fixed
assets, net
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6,619
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5,563
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Intangible
assets, net
|
4,430
|
4,226
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Goodwill
|
2,969
|
2,936
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Operating
lease right-of-use assets
|
15,748
|
-
|
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Other
assets, net
|
9,953
|
4,189
|
|
|
|
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TOTAL ASSETS
|
$
523,241
|
$
350,911
|
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LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
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Securities
sold, not yet purchased – at fair value
|
$
4,385
|
$
-
|
|
Loans
received
|
-
|
4,008
|
|
Debt
securities issued
|
39,150
|
28,538
|
|
Customer
liabilities
|
192,754
|
82,032
|
|
Trade
payables
|
56,130
|
32,695
|
|
Deferred
distribution payments
|
8,534
|
8,534
|
|
Securities
repurchase agreement obligations
|
57,875
|
73,621
|
|
Current
income tax liability
|
165
|
754
|
|
Operating
lease obligations
|
17,270
|
-
|
|
Other
liabilities
|
5,067
|
3,132
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TOTAL LIABILITIES
|
381,330
|
233,314
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Commitments and Contingent Liabilities
|
-
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-
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STOCKHOLDERS’ EQUITY
|
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Preferred
stock - $0.001 par value; 20,000,000 shares authorized, no shares
issued or outstanding
|
-
|
-
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Common
stock - $0.001 par value; 500,000,000 shares authorized; 58,343,212
and 58,043,212 shares issued and outstanding as of December 31,
2019 and March 31, 2019, respectively
|
58
|
58
|
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Additional
paid in capital
|
102,149
|
99,093
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Retained
earnings
|
62,007
|
41,498
|
|
Accumulated
other comprehensive loss
|
(21,618
)
|
(23,052
)
|
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TOTAL EQUITY ATTRIBUTABLE TO THE COMPANY
|
142,596
|
117,597
|
|
|
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Noncontrolling
interest
|
(685
)
|
-
|
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TOTAL STOCKHOLDERS’ EQUITY
|
141,911
|
117,597
|
|
|
|
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
|
$
523,241
|
$
350,911
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements
3
FREEDOM HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF
O
PERATIONS AND STATEMENTS OF OTHER COMPREHENSIVE
INCOME/(LOSS) (Unaudited)
(All amounts in thousands of United States dollars, except share
data, unless otherwise stated)
|
|
Three months
ended
December
31,
|
Nine months
ended
December
31,
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||
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2019
|
2018
|
2019
|
2018
|
|
Revenue:
|
|
|
|
|
|
Fee
and commission income
|
$
20,583
|
$
12,274
|
$
69,538
|
$
31,033
|
|
Net
gain on trading securities
|
6,448
|
11,641
|
12,957
|
12,669
|
|
Interest
income
|
3,063
|
2,976
|
8,999
|
11,823
|
|
Net
loss on foreign exchange operations
|
(1,080
)
|
(498
)
|
(241
)
|
(3,746
)
|
|
Net
gain on derivatives
|
556
|
-
|
556
|
-
|
|
|
|
|
|
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TOTAL REVENUE, NET
|
29,570
|
26,393
|
91,809
|
51,779
|
|
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Expense:
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Interest
expense
|
3,167
|
3,180
|
9,976
|
11,471
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Fee
and commission expense
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5,525
|
1,422
|
14,068
|
3,155
|
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Operating
expense
|
16,608
|
12,117
|
43,214
|
31,272
|
|
Provision
/(recovery) for impairment losses
|
152
|
243
|
(1,316
)
|
358
|
|
Other
expense/(income), net
|
118
|
(14
)
|
675
|
223
|
|
Loss
from disposal of subsidiary
|
-
|
-
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-
|
15
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TOTAL EXPENSE
|
25,570
|
16,948
|
66,617
|
46,494
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NET
INCOME BEFORE INCOME TAX
|
4,000
|
9,445
|
25,192
|
5,285
|
|
|
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Income
tax benefit/(expense)
|
50
|
(545
)
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(4,292
)
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(1,009
)
|
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NET INCOME
|
$
4,050
|
$
8,900
|
$
20,900
|
$
4,276
|
|
|
|
|
|
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Less:
Net loss attributable to noncontrolling interest in
subsidiary
|
(991
)
|
-
|
(1,120
)
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-
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NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
$
5,041
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$
8,900
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$
22,020
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$
4,276
|
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OTHER
COMPREHENSIVE INCOME/(LOSS)
|
|
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Change
in unrealized gain on available-for-sale securities, net of tax
effect
|
$
(1
)
|
$
-
|
$
26
|
$
-
|
|
Reclassification
adjustment relating to available-for-sale securities disposed of in
the period, net of tax effect
|
-
|
-
|
-
|
22
|
|
Foreign
currency translation adjustments, net of tax effect
|
2,841
|
(5,596
)
|
1,408
|
(17,836
)
|
|
|
|
|
|
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COMPREHENSIVE INCOME/(LOSS) BEFORE NONCONTROLLING
INTERESTS
|
$
6,890
|
$
3,304
|
$
22,334
|
$
(13,538
)
|
|
|
|
|
|
|
|
Less:
Comprehensive loss attributable to noncontrolling interest in
subsidiary
|
(991
)
|
-
|
(1,120
)
|
-
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME/(LOSS) ATTRIBUTABLE TO COMMON
SHAREHOLDERS
|
$
7,881
|
$
3,304
|
23,454
|
$
(13,538
)
|
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BASIC
NET INCOME PER COMMON SHARE
|
$
0.07
|
$
0.15
|
$
0.36
|
$
0.07
|
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DILUTED
NET INCOME PER COMMON SHARE
|
$
0.07
|
$
0.15
|
$
0.36
|
$
0.07
|
|
Weighted
average number of shares (basic)
|
58,158,864
|
58,038,864
|
58,116,825
|
58,035,103
|
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Weighted
average number of shares (diluted)
|
58,391,547
|
58,248,924
|
58,335,749
|
58,225,549
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
4
FREEDOM HOLDING CORP.
CONDENSED CONSOLIDATED
STATEMENTS OF
C
ASH FLOWS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
For the nine months
ended
|
|
|
|
December 31,
2019
|
December 31,
2018
|
|
|
|
|
|
Cash
Flows From Operating Activities
|
|
|
|
Net
income
|
$
20,900
|
$
4,276
|
|
Adjustments to
reconcile net income from operating activities:
|
|
|
|
Depreciation
and amortization
|
1,925
|
1,503
|
|
Depreciation
of lease assets
|
3,322
|
-
|
|
Loss on sale of
fixed assets
|
202
|
31
|
|
Change in deferred
taxes
|
1,001
|
(260
)
|
|
Stock compensation
expense
|
2,100
|
2,533
|
|
Share based
payment
|
836
|
-
|
|
Unrealized loss on
trading securities
|
5,251
|
9,623
|
|
Unrealized gain on
derivative asset
|
(233
)
|
-
|
|
Net change in
accrued interest
|
610
|
75
|
|
Allowance for
receivables
|
(1,316
)
|
350
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Changes in lease
liabilities
|
(4,733
)
|
-
|
|
Trading
securities
|
(59
)
|
14,277
|
|
Brokerage and other
receivables
|
(80,423
)
|
(28,968
)
|
|
Loans
issued
|
(8,180
)
|
5,644
|
|
Other
assets
|
(5,763
)
|
(292
)
|
|
Customer
liabilities
|
105,560
|
32,620
|
|
Current income tax
liability
|
(593
)
|
81
|
|
Trade
payables
|
22,069
|
4,931
|
|
Securities sold,
not yet purchased
|
4,385
|
(1,071
)
|
|
Other
liabilities
|
1,784
|
526
|
|
Net
cash flows from operating activities
|
68,645
|
45,879
|
|
|
|
|
|
Cash
Flows From Investing Activities
|
|
|
|
Purchase of fixed
assets
|
(3,608
)
|
(4,311
)
|
|
Proceeds from sale
of fixed assets
|
468
|
268
|
|
Proceeds from
sale/(purchase) of available-for-sale securities, at
fair value,
net
|
(7,455
)
|
235
|
|
Consideration paid
for Asyl Invest
|
-
|
(2,240
)
|
|
Net
cash flows used in investing activities
|
(10,595
)
|
(6,048
)
|
|
Cash
Flows From Financing Activities
|
|
|
|
Repurchase of
securities repurchase agreement obligations
|
(15,285
)
|
(65,238
)
|
|
Proceeds from
issuance of debt securities
|
17,722
|
22,059
|
|
Repurchase of debt
securities
|
(7,256
)
|
(3,346
)
|
|
Proceeds from loans
received
|
-
|
5,615
|
|
Repayment of loans
received
|
(4,008
)
|
(8,143
)
|
|
Exercise of
options
|
455
|
-
|
|
Capital
contributions
|
-
|
245
|
|
Net
cash flows used in financing activities
|
(8,372
)
|
(48,808
)
|
|
Effect of changes
in foreign exchange rates on cash
and cash
equivalents
|
5,281
|
(10,188
)
|
|
|
|
|
|
NET
CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
|
54,959
|
(19,165
)
|
|
CASH,
CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF
PERIOD
|
88,420
|
87,693
|
|
CASH,
CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
|
$
143,379
|
$
68,528
|
5
FREEDOM HOLDING CORP.
CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS (
continued)
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
For the nine
months ended
|
|
|
|
December 31,
2019
|
December 31,
2018
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
Cash paid for
interest
|
$
7,686
|
$
10,654
|
|
Income tax
paid
|
$
5,094
|
$
417
|
|
|
|
|
|
Supplemental
non-cash disclosures:
|
|
|
|
Operating lease
right-of-use assets obtained in exchange for operating lease
obligations
|
$
14,960
|
$
-
|
|
Lease obligations
obtained on adoption of new lease standard
|
$
16,471
|
$
-
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
6
FREEDOM HOLDING CORP.
CONDENSED
CONSOLIDATED
STATEMENTS
OF SHAREHOLDERS’
E
QUITY
(
Unaudited)
(All amounts in thousands of United States dollars, except share
data, unless otherwise stated)
|
|
Common Stock
|
|
|
|
|
|
|
|
|
Shares
|
Amount
|
Additional paid in
capital
|
Retained
earnings
|
Accumulated
other comprehensive loss
|
Noncontrolling
interest
|
Total
|
|
At March 31, 2018
|
58,033,212
|
$
58
|
$
100,180
|
$
34,352
|
$
(7,557
)
|
$
-
|
$
127,033
|
|
|
|
|
|
|
|
|
|
|
Capital
contributions
|
10,000
|
-
|
245
|
-
|
-
|
-
|
245
|
|
Acquisition
of Asyl Invest
|
-
|
-
|
(2,240
)
|
-
|
-
|
-
|
(2,240
)
|
|
Acquisition
of Nettrader
|
-
|
-
|
(2,590
)
|
-
|
-
|
-
|
(2,590
)
|
|
Stock
based compensation
|
-
|
-
|
2,533
|
-
|
-
|
-
|
2,533
|
|
Reclassification
adjustment relating to available-for-sale investments disposed of
in the period, net of tax effect
|
-
|
-
|
-
|
-
|
22
|
-
|
22
|
|
Translation
difference
|
-
|
-
|
-
|
-
|
(17,836
)
|
-
|
(17,836
)
|
|
Net
income
|
-
|
-
|
-
|
4,276
|
-
|
-
|
4,276
|
|
At December 31, 2018
|
58,043,212
|
$
58
|
$
98,128
|
$
38,628
|
$
(25,371
)
|
$
-
|
$
111,443
|
|
|
|
|
|
|
|
|
|
|
At March 31, 2019
|
58,043,212
|
$
58
|
$
99,093
|
$
41,498
|
$
(23,052
)
|
$
-
|
$
117,597
|
|
|
|
|
|
|
|
|
|
|
Cumulative-effect
adjustment due to adoption of ASU 2016-02
(1)
|
-
|
-
|
-
|
(1,511
)
|
-
|
-
|
(1,511
)
|
|
Exercise
of options
|
230,000
|
-
|
455
|
-
|
-
|
-
|
455
|
|
Stock
based compensation
|
-
|
-
|
2,100
|
-
|
-
|
-
|
2,100
|
|
Share
based payment
|
70,000
|
-
|
836
|
-
|
-
|
-
|
836
|
|
Sale
of Freedom UA shares
|
-
|
-
|
(335
)
|
-
|
-
|
435
|
100
|
|
Change
in unrealized gain on available-for-sale securities, net of tax
effect
|
-
|
-
|
-
|
-
|
26
|
-
|
26
|
|
Translation
difference
|
-
|
-
|
-
|
-
|
1,408
|
-
|
1,408
|
|
Net
income/(loss)
|
-
|
-
|
-
|
22,020
|
-
|
(1,120
)
|
20,900
|
|
At December 31, 2019
|
58,343,212
|
$
58
|
$
102,149
|
$
62,007
|
$
(21,618
)
|
$
(685
)
|
$
141,911
|
(1)
Cumulative-effect adjustment to beginning retained
earnings related to the recognition of pre-existing lease
liabilities and operating lease right-of-use assets in accordance
with ASU 2016-02, adopted as of April 1, 2019.
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
7
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
N
OTE 1 – DESCRIPTION OF
BUSINESS
Overview
Freedom
Holding Corp. (the “Company” or “FRHC”) is
a corporation organized in the United States under the laws of the
State of Nevada that through its operating subsidiaries provides
financial services including retail securities brokerage, research,
investment counseling, securities trading, market making, corporate
investment banking and underwriting services in Eastern Europe and
Central Asia. The Company is headquartered in Almaty, Kazakhstan,
with supporting administrative office locations in Russia, Cyprus
and the United States. The Company has retail locations in Russia,
Kazakhstan, Ukraine, Uzbekistan, Kyrgyzstan and Germany. The
Company’s common stock was uplisted from the OTCQX Best
Market and began trading on the Nasdaq Capital Market on October
15, 2019.
The
Company owns directly, or through subsidiaries, the following
companies: LLC Investment Company Freedom Finance, a Moscow,
Russia-based securities broker-dealer (“Freedom RU”);
LLC FFIN Bank, a Moscow, Russia-based bank (“FFIN
Bank”); JSC Freedom Finance, an Almaty, Kazakhstan-based
securities broker-dealer (“Freedom KZ”); Freedom
Finance Cyprus Limited, a Limassol, Cyprus-based broker-dealer
(“Freedom CY”); Freedom Finance Germany TT GmbH
(“Freedom GE”), a Munich, Germany-based tied agent of
Freedom CY; LLC Freedom Finance Uzbekistan, a Tashkent,
Uzbekistan-based broker-dealer (“Freedom UZ”); and FFIN
Securities, Inc., a Nevada corporation
(“FFIN”).
To
comply with certain foreign ownership restrictions relating to
registered Ukrainian broker-dealers, on August 24, 2019, the
Company sold 67.12% of the outstanding equity interest of LLC
Freedom Finance Ukraine, a Kiev, Ukraine-based broker-dealer
(“Freedom UA”) to Askar Tashtitov, the Company’s
president. The Company retained the remaining 32.88% of the
outstanding equity interests in Freedom UA. On August 24, 2019, the
Company also entered into a series of contractual arrangements with
Freedom UA and Mr. Tashtitov, including a consulting services
agreement, an operating agreement and an option agreement. Because
such agreements obligate the Company to guarantee the performance
of all Freedom UA obligations and provide Freedom UA sufficient
funding to cover all Freedom UA operating losses and net capital
requirements, enable the Company to receive 90% of the net profits
of Freedom UA after tax, and require the Company to provide Freedom
UA the management competence, operational support, and ongoing
access to the Company’s significant assets, technology
resources and expertise to necessary to conduct the business of
Freedom UA, the Company accounts for Freedom UA as a variable
interest entity (“VIE”) under the accounting standards
of the Financial Accounting Standards Board (“FASB”).
Accordingly, the financial statements of Freedom UA are
consolidated into the financial statements of the
Company.
The
Company’s subsidiaries are participants on the Kazakhstan
Stock Exchange (KASE), Astana International Exchange (AIX), Moscow
Exchange (MOEX), Saint-Petersburg Exchange (SPBX), Ukrainian
Exchange (UX), and Republican Stock Exchange of Tashkent (UZSE).
Freedom CY serves to provide the Company’s clients with
operations support and access to the investment opportunities,
relative stability, and integrity of the U.S. and European
securities markets, which under the regulatory regimes of a number
of jurisdictions where the Company operates do not currently allow
investors direct access to international securities
markets.
8
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Unless
otherwise specifically indicated or as is otherwise contextually
required, FRHC, Freedom RU, FFIN Bank, Freedom KZ, Freedom CY,
Freedom GE, Freedom UA, Freedom UZ and FFIN are collectively
referred to herein as the “Company”.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of presentation and principles of consolidation
The
accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles in the United States (U.S. GAAP) for interim financial
information and with the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by U.S. GAAP for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the
nine month period ended December 31, 2019, are not necessarily
indicative of the results that may be expected for the fiscal year
ended March 31, 2020.
The
Condensed Consolidated Balance Sheet at March 31, 2019, has been
derived from the audited consolidated financial statements at that
date but does not include all the information and footnotes
required by U.S. GAAP for complete financial
statements.
The
Company’s unaudited condensed consolidated financial
statements present the consolidated accounts of FRHC, Freedom RU,
Freedom KZ, FFIN Bank, Freedom CY, Freedom UA, Freedom UZ, Freedom
GE and FFIN. All significant inter-company balances and
transactions have been eliminated from the unaudited condensed
consolidated financial statements.
For
further information, refer to the consolidated financial statements
and footnotes included in the Company’s Annual Report on Form
10-K for the year ended March 31, 2019.
Consolidation of variable interest entities
In
accordance with accounting standards regarding consolidation of
variable interest entities, VIEs are generally entities that lack
sufficient equity to finance their activities without additional
financial support from other parties or whose equity holders lack
adequate decision making ability. VIEs must be evaluated to
determine the primary beneficiary of the risks and rewards of the
VIE. The primary beneficiary is required to consolidate the VIE for
financial reporting purposes.
9
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Use of estimates
The
preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Management believes that the estimates used
in preparing its financial statements are reasonable and prudent.
Actual results could differ from those estimates.
Revenue recognition
Accounting
Standards Codification (“ASC”) Topic 606, Revenue from
Contracts with Customers (“ASC Topic 606”), establishes
principles for reporting information about the nature, amount,
timing and uncertainty of revenue and cash flows arising from the
entity’s contracts to provide goods or services to customers.
The core principle requires an entity to recognize revenue to
depict the transfer of goods or services promised to customers in
an amount that reflects the consideration that it expects to be
entitled to receive in exchange for those goods or services
recognized as performance obligations are satisfied. A significant
portion of the Company’s revenue-generating transactions are
not subject to ASC Topic 606, including revenue generated from
financial instruments, such as loans and investment securities, as
these activities are subject to other U.S. GAAP guidance discussed
elsewhere within these disclosures. Descriptions of the
Company’s revenue-generating activities that are within the
scope of ASC Topic 606, which are presented in the Condensed
Consolidated Statements of Operations and Statements of Other
Comprehensive Income/(Loss) as components of non-interest income
are as follows:
●
Commissions on
brokerage services;
●
Commissions on
banking services (money transfers, foreign exchange operations and
other); and
●
Commissions on
investment banking services (underwriting, market making, and
bondholders’ representation services).
The
Company adopted the guidance on April 1, 2018. Under Topic 606, the
Company is required to recognize incentive fees when they are
probable and there is not a significant chance of reversal in the
future. For the brokerage commission, banking service
commission and investment banking services commission contracts in
place at the time of adoption, this change in policy did not result
in any actual change in revenue that had already been recognized
and therefore there was no transition adjustment
necessary.
The
Company recognizes revenue when five basic criteria have been
met:
●
The parties to the
contract have approved the contract (in writing, orally, or in
accordance with other customary business practices) and are
committed to perform their respective obligations;
●
The entity can
identify each party’s rights regarding the goods or services
to be transferred;
●
The entity can
identify the payment terms for the goods or services to be
transferred;
●
The contract has
commercial substance (that is, the risk, timing, or amount of the
entity’s future cash flows is expected to change as a result
of the contract); and
●
It is probable that
the entity will collect substantially all of the consideration to
which it will be entitled in exchange for the goods or services
that will be transferred to the customer.
10
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Derivative financial instruments
In the
normal course of business, the Company invests in various
derivative financial contracts including futures. Derivatives are
initially recognized at fair value at the date a derivative
contract is entered into and are subsequently re-measured to their
fair value at each reporting date. The fair values are estimated
based on quoted market prices or pricing models that take into
account the current market and contractual prices of the underlying
instruments and other factors. Derivatives are carried as assets
when their fair value is positive and as liabilities when it is
negative.
Functional currency
Management
has adopted ASC 830, Foreign Currency Translation Matters as it
pertains to its foreign currency translation. The Company’s
functional currencies are the Russian ruble, European euro,
Ukrainian hryvnia, Uzbekistani som and Kazakhstani tenge, and its
reporting currency is the United States dollar. For financial
reporting purposes, foreign currencies are translated into U.S.
dollars as the reporting currency. Monetary assets and liabilities
denominated in foreign currencies are translated into United States
dollars using the exchange rate prevailing at the balance sheet
date. Non-monetary assets and liabilities denominated in foreign
currencies are translated at rates of exchange in effect at the
date of the transaction. Average monthly rates are used to
translate revenues and expenses. Translation adjustments arising
from the use of different exchange rates from period to period are
included as a component of stockholders’ equity as
“Accumulated other comprehensive loss”.
Cash and cash equivalents
Cash
and cash equivalents are generally comprised of certain highly
liquid investments with maturities of three months or less at the
date of purchase. Cash and cash equivalents include reverse
repurchase agreements which are recorded at the amounts at which
the securities were acquired or sold plus accrued
interest.
Securities reverse repurchase and repurchase
agreements
A
reverse repurchase agreement is a transaction in which the Company
purchases financial instruments from a seller, typically in
exchange for cash, and simultaneously enters into an agreement to
resell the same or substantially the same financial instruments to
the seller for an amount equal to the cash or other consideration
exchanged plus interest at a future date. Securities purchased
under reverse repurchase agreements are accounted for as
collateralized financing transactions and are recorded at the
contractual amount for which the securities will be resold,
including accrued interest. Financial instruments purchased under
reverse repurchase agreements are recorded in the financial
statements as cash placed on deposit collateralized by securities
and classified as cash and cash equivalents in the Condensed
Consolidated Balance Sheets.
11
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
A
repurchase agreement is a transaction in which the Company sells
financial instruments to another party, typically in exchange for
cash, and simultaneously enters into an agreement to reacquire the
same or substantially the same financial instruments from the buyer
for an amount equal to the cash or other consideration exchanged
plus interest at a future date. These agreements are accounted for
as collateralized financing transactions. The Company retains the
financial instruments sold under repurchase agreements and
classifies them as trading securities in the Condensed Consolidated
Balance Sheets. The consideration received under repurchase
agreements is classified as securities repurchase agreement
obligations in the Condensed Consolidated Balance
Sheets.
The Company enters into reverse repurchase, repurchase, securities
borrowed and securities loaned transactions to, among other things,
acquire securities to leverage and grow its proprietary trading
portfolio, cover short positions and settle other securities
obligations, to accommodate customers’ needs and to finance
its inventory positions.
The Company enters into these
transactions in accordance with normal market practice. Under
standard terms for repurchase transactions, the recipient of
collateral has the right to sell or repledge the collateral,
subject to returning equivalent securities on settlement of the
transaction.
Available-for-sale securities
Financial
assets categorized as available-for-sale (“AFS”) are
non-derivatives that are either designated as available-for-sale or
not classified as (a) loans and receivables, (b) held to maturity
investments or (c) trading securities.
Listed
shares and listed redeemable notes held by the Company that are
traded in an active market are classified as AFS and are stated at
fair value. The Company has investments in unlisted shares that are
not traded in an active market but that are also classified as
investments AFS and stated at fair value (because Company
management considers that fair value can be reliably measured).
Gains and losses arising from changes in fair value are recognized
in other comprehensive income/(loss) and are accumulated in
accumulated other comprehensive loss, with the exception of
other-than-temporary impairment losses, interest calculated using
the effective interest method, dividend income and foreign exchange
gains and losses, which are recognized in the Condensed
Consolidated Statements of Operations and Statements of other
Comprehensive Income/(Loss). Where the investment is disposed of or
is determined to be impaired, the cumulative gain or loss
previously accumulated in the investments’ revaluation
reserve is then reclassified to Condensed Consolidated Statements
of Operations and Statements of Other Comprehensive
Income/(Loss).
Trading securities
Financial
assets are classified as trading securities if the financial asset
has been acquired principally for the purpose of selling it in the
near term.
12
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Trading
securities are stated at fair value, with any gains or losses
arising on remeasurement recognized in revenue. Changes in fair
value are recognized in the Condensed Consolidated Statements of
Operations and Statements of Other Comprehensive Income/(Loss) and
included in net gain/(loss) on trading securities. Interest earned
and dividend income are recognized in the Condensed Consolidated
Statements of Operations and Statements of Other Comprehensive
Income/(Loss) and are included in interest income, according to the
terms of the contract and when the right to receive the payment has
been established.
Investments in
nonconsolidated managed funds are accounted for at fair value based
on the net asset value (“NAV”) of the funds
provided by the fund managers with gains or losses included in net
gain on trading securities in the Condensed Consolidated Statements
of Operations and Statements of Other Comprehensive
Income/(Loss).
Debt securities issued
Debt
securities issued are initially recognized at the fair value of the
consideration received, less directly attributable transaction
costs. Subsequently, amounts due are stated at amortized cost and
any difference between net proceeds and the redemption value is
recognized over the period of the borrowings using the effective
interest method. If the Company purchases its own debt, it is
removed from the Condensed Consolidated Balance Sheets and the
difference between the carrying amount of the liability and the
consideration paid is recognized in the Condensed Consolidated
Statements of Operations and Statements of Other Comprehensive
Income/(Loss).
Brokerage and other receivables
Brokerage
and other receivables are comprised of commissions and receivables
related to the securities brokerage and banking activity of the
Company. At initial recognition, brokerage and other receivables
are recognized at fair value. Subsequently, brokerage and other
receivables are carried at cost net of any allowance for impairment
losses.
Derecognition of financial assets
A
financial asset (or, where applicable, a part of a financial asset
or a part of a group of similar financial assets) is derecognized
where all of the following conditions are met:
●
The transferred
financial asset has been isolated from the Company - put
presumptively beyond the reach of the Company and its creditors,
even in bankruptcy or other receivership.
●
The transferee has
rights to pledge or exchange the financial asset.
●
The Company or its
agents do not maintain effective control over the transferred
financial asset or third-party beneficial interests related to the
transferred asset.
Where
the Company has not met the asset derecognition conditions above,
it continues to recognize the asset to the extent of its continuing
involvement.
13
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Impairment of long-lived assets
In
accordance with the accounting guidance for the impairment or
disposal of long-lived assets, the Company periodically evaluates
the carrying value of long-lived assets to be held and used when
events and circumstances warrant such a review. The carrying value
of a long-lived asset is considered impaired when the fair value
from such asset is less than its carrying value. In that event, a
loss is recognized based on the amount by which the carrying value
exceeds the fair value of the long-lived asset. Fair value is
determined primarily using the anticipated cash flows, discounted
at a rate commensurate with the risk involved. Losses on long-lived
assets to be disposed of are determined in a similar manner, except
that fair values are reduced for the cost of disposal. As of
December 31, 2019 and March 31, 2019, the Company had not recorded
any charges for impairment of long-lived assets.
Impairment of goodwill
As of
December 31, 2019 and March 31, 2019, goodwill recorded in the
Company’s Condensed Consolidated Balance Sheets totaled
$2,969 and $2,936, respectively. The Company performs an impairment
review at least annually unless indicators of impairment exist in
interim periods. The impairment test for goodwill uses a two-step
approach. Step one compares the estimated fair value of a reporting
unit with goodwill to its carrying value. If the carrying value
exceeds the estimated fair value, step two must be performed. Step
two compares the carrying value of the reporting unit to the fair
value of all of the assets and liabilities of the reporting unit as
if the reporting unit was acquired in a business combination. If
the carrying amount of a reporting unit's goodwill exceeds the
implied fair value of its goodwill, an impairment loss is
recognized in an amount equal to the excess. In its annual goodwill
impairment test, the Company estimated the fair value of the
reporting unit based on the income approach (also known as the
discounted cash flow method) and determined the fair value of the
Company’s reporting unit exceeded the carrying amount of the
Company’s goodwill.
The
changes in the carrying amount of goodwill as of March 31, 2019 and
for the nine months ended December 31, 2019 were as
follows:
|
Balance
as of
March 31
,
2019
|
$
2,936
|
|
|
|
|
Foreign currency
translation
|
33
|
|
|
|
|
Balance
as of December 31, 2019
|
$
2,969
|
Income taxes
The
Company recognizes deferred tax liabilities and assets based on the
difference between the financial statements and tax basis of assets
and liabilities using the enacted tax rates in effect for the year
in which the differences are expected to reverse. The measurement
of deferred tax assets is reduced, if necessary, by the amount of
any tax benefits that, based on available evidence, are not
expected to be realized.
14
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Current
income tax expenses are provided for in accordance with the laws of
the relevant taxing authorities. As part of the process of
preparing financial statements, the Company is required to estimate
its income taxes in each of the jurisdictions in which it operates.
The Company accounts for income taxes using the asset and liability
approach. Under this method, deferred income taxes are recognized
for tax consequences in future years based on differences between
the tax bases of assets and liabilities and their reported amounts
in the financial statements at each year-end and tax loss carry
forwards. Deferred tax assets and liabilities are measured using
enacted tax rates applicable for the differences that are expected
to affect taxable income.
The
Company will include interest and fines arising from the
underpayment of income taxes in the provision for income taxes (if
any anticipated). As of December 31, 2019, and March 31, 2019, the
Company had no accrued interest or fines related to uncertain tax
positions.
The
Global Intangible Low-Taxed Income ("GILTI") provisions of the Tax
Reform Act require the Company to include in its U.S. income tax
return foreign subsidiary earnings in excess of an allowable return
on the foreign subsidiary’s tangible assets. The Company has
presented the deferred tax impacts of GILTI tax in its condensed
consolidated financial statements as of December 31, 2019 and March
31, 2019.
Financial instruments
Financial
instruments are carried at fair value as described
below.
Fair
value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value
measurement is based on the presumption that the transaction to
sell the asset or transfer the liability takes place either in the
principal market for the asset or liability, or in the absence of a
principal market, in the most advantageous market for the asset or
liability. Fair value is the current bid price for financial
assets, current ask price for financial liabilities and the average
of current bid and ask prices when the Company is both in short and
long positions for the financial instrument. A financial instrument
is regarded as quoted in an active market if quoted prices are
readily and regularly available from an exchange or other
institution and those prices represent actual and regularly
occurring market transactions on an arm’s length
basis.
Leases
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842),
which establishes a right-of-use model that requires a lessee to
record a right-of-use asset and a lease liability on the balance
sheet for all leases with terms longer than 12 months. Leases have
been classified as either finance or operating, with classification
affecting the pattern of expense recognition in the Condensed
Consolidated Statements of Operations and Statements of Other
Comprehensive Income/(Loss). The new standard also requires
disclosures that provide additional information on recorded lease
arrangements. In July 2018, the FASB issued ASU 2018-11, Leases
–Targeted Improvements, which provides an optional transition
method that allows entities to initially apply the new lease
standard at the adoption date and recognize a cumulative-effect
adjustment to the opening balance of retained earnings in the
period of adoption.
15
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
The Company adopted the provisions of ASU 2018-11, including the
optional transition method, on April 1, 2019. Operating lease
assets and corresponding lease liabilities were recognized on the
Company’s unaudited condensed consolidated balance sheets.
Refer to Note 18 - Leases, within the notes to the unaudited
condensed consolidated financial statements for additional
disclosure and significant accounting policies affecting
leases.
Fixed assets
Fixed assets are carried at cost, net of accumulated depreciation.
Maintenance, repairs, and minor renewals are expensed as incurred.
Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, which range between three and
seven years.
Segment information
The Company operates in a single operating segment offering
financial services to its customers in a single geographic region
covering Central Asia and Eastern Europe. The Company’s
financial services business provides
retail securities
brokerage, research, investment counseling, securities trading,
market making, corporate investment banking and underwriting
services to its customers. The Company generates revenue from
customers primarily from fee and commission income and interest
income.
The Company does not use
profitability reports or other information disaggregated on a
regional, country or divisional basis for making business
decisions.
Recent accounting pronouncements
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value
Measurement (Topic 820), Disclosure Framework—Changes to the
Disclosure Requirements for Fair Value Measurement. In March 2014,
the Board issued a proposed FASB Concepts Statement, Conceptual
Framework for Financial Reporting—Chapter 8: Notes to
Financial Statements, which the Board finalized on August 28, 2018.
The disclosure framework project’s objective and primary
focus are to improve the effectiveness of disclosures in the notes
to financial statements by facilitating clear communication of the
information required by GAAP. The amendments in this Update modify
the disclosure requirements on fair value measurements in Topic
820, Fair Value Measurement, based on the concepts in the Concepts
Statement, including the consideration of costs and benefits. The
amendments in this Update apply to all entities that are required,
under existing GAAP, to make disclosures about recurring or
nonrecurring fair value measurements. The amendments in this Update
are effective for all entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15,
2019. The Company is currently evaluating the impact of the new
guidance on its condensed consolidated financial
statements.
16
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
In
November 2018, the FASB issued ASU No. 2018-19, Codification
Improvements to Topic 326, Financial Instruments—Credit
Losses. On June 16, 2016, the FASB issued Accounting Standards
Update No. 2016-13, Financial Instruments—Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments,
which introduced an expected credit loss methodology for the
impairment of financial assets measured at amortized cost basis.
That methodology replaces the probable, incurred loss model for
those assets. Through that Update, the Board added Topic 326 and
made several consequential amendments to the FASB Accounting
Standards Codification. The amendment clarifies that receivables
arising from operating leases are not within the scope of Subtopic
326-20. Instead, impairment of receivables arising from operating
leases should be accounted for in accordance with Topic 842,
Leases. For public business entities that are U.S. Securities and
Exchange Commission (SEC) filers, the amendments in this Update are
effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. The effective
date and transition requirements for the amendments in this Update
are the same as the effective dates and transition requirements in
Update 2016-13, as amended by this Update. The Company does not
expect a material impact from the new guidance on its condensed
consolidated financial statements.
In
April 2019, FASB also issued ASU No. 2019-04, Codification
Improvements to Topic 326, Financial Instruments-Credit Losses,
Topic 815, Derivatives and Hedging, and Topic 825, Financial
Instruments and in May 2019, FASB issued ASU No. 2019-05, Financial
Instruments-Credit Losses (Topic 326). The ASU 2019-04 amendments
affect a variety of Topics in the Codification and is part of the
Board’s ongoing project on Codification improvement. The FASB
received several agenda request letters asking that the Board
consider amending the transition guidance for Update 2016-13. ASU
2019-05 addresses stakeholders’ concerns by providing an
option to irrevocably elect the fair value option for certain
financial assets previously measured at amortized cost basis. For
those entities, the targeted transition relief will increase
comparability of financial statement information by providing an
option to align measurement methodologies for similar financial
assets. Furthermore, the targeted transition relief also may reduce
the costs for some entities to comply with the amendments in Update
2016-13 while still providing financial statement users with
decision-useful information. For entities that have not yet adopted
the amendments in Update 2016-13, the effective dates and
transition requirements for the amendments related to ASU 2019-04
are the same as the effective dates and transition requirements in
Update 2016-13. ASU 2019-05 is effective for entities that have
adopted the amendments in Update 2016-13 for fiscal years beginning
after December 15, 2019, including interim periods within those
fiscal years. Early adoption is permitted in any interim period
after the issuance of this Update as long as an entity has adopted
the amendments in Update 2016-13. The Company is currently
evaluating the impact from new guidance on its condensed
consolidated financial statements.
In July
2019, the FASB issued ASU 2019-07, Codification Updates to SEC
Sections. This ASU amends various SEC paragraphs pursuant to the
issuance of SEC Final Rule Releases No. 33-10532, Disclosure Update
and Simplification, and Nos. 33-10231 and 33-10442, Investment
Company Reporting Modernization. One of the changes in the ASU
requires a presentation of changes in stockholders’ equity in
the form of a reconciliation, either as a separate financial
statement or in the notes to the financial statements, for the
current and comparative year-to-date interim periods. The Company
presented changes in stockholders' equity as separate financial
statements for the current and comparative year-to-date interim
periods beginning on April 1, 2019. The additional elements of the
ASU did not have a material impact on the Company's condensed
consolidated financial statements. This guidance was effective
immediately upon issuance.
17
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
In
November 2019, the FASB issued ASU 2019-10 Financial
Instruments-Credit Losses (Topic 326), Derivatives and Hedging
(Topic 815), and Leases (Topic 842). On the basis of feedback
obtained from outreach with stakeholders and monitoring of
implementation, the Board has gained a greater understanding about
the implementation challenges encountered by all types of entities
when adopting a major Update. The Board developed a philosophy to
extend and simplify how effective dates are staggered between
larger public companies (bucket one) and all other entities (bucket
two). Those other entities include private companies, smaller
public companies, not-for-profit organizations, and employee
benefit plans. Under this philosophy, a major Update would first be
effective for bucket-one entities, that is, public business
entities that are Securities and Exchange Commission (SEC) filers,
excluding entities eligible to be smaller reporting companies
(SRCs) under the SEC's definition. The Master Glossary of the
Codification defines public business entities and SEC filers. All
other entities, including SRCs, other public business entities, and
nonpublic business entities (private companies, not-for-profit
organizations, and employee benefit plans) would compose bucket
two. For those entities, it is anticipated that the Board will
consider requiring an effective date staggered at least two years
after bucket one for major Updates. The Company is currently an SRC
and according to the ASU 2019-10, for bucket two, ASU 2016-13, ASU
2017-12 and ASU 2016-02 is effective for fiscal years beginning
after December 15, 2022. ASU 2016-02, Leases (Topic 842) was
adopted by the Company beginning April 1, 2019. The Company is
currently evaluating the impact that ASU 2019-10 will have on its
financial statements and related disclosures.
In
November 2019, the FASB issued ASU 2019-11, Codification
Improvements to Topic 326, Financial Instruments-Credit Losses. On
June 16, 2016, the FASB issued Accounting Standards Update No.
2016-13, Financial Instruments—Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, which
introduced an expected credit loss model for the impairment of
financial assets measured at amortized cost basis. That model
replaces the probable, incurred loss model for those assets.
Through the amendments in that Update, the Board added Topic 326,
Financial Instruments—Credit Losses, and made several
consequential amendments to the Codification. The amendments apply
to all reporting entities within the scope of the affected
accounting guidance. ASU 2019-11 is effective for fiscal years
beginning after December 15, 2022. The Company is currently
evaluating the impact that this guidance will have on its financial
statements and related disclosures.
In
December 2019, the FASB issued ASU No. 2019-12, Simplifying the
Accounting for Income Taxes (“ASU 2019-12”), which
simplifies the accounting for income taxes, eliminates certain
exceptions within ASC 740, Income Taxes, and clarifies certain
aspects of the current guidance to promote consistency among
reporting entities. ASU 2019-12 is effective for fiscal years
beginning after December 15, 2021. Most amendments within the
standard are required to be applied on a prospective basis, while
certain amendments must be applied on a retrospective or modified
retrospective basis. We are currently evaluating the impacts of the
provisions of ASU 2019-12 on our financial condition, results of
operations, and cash flows.
18
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 3 – CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of the following:
|
|
December 31,
2019
|
March 31,
2019
|
|
|
|
|
|
Securities
purchased under reverse repurchase agreements
|
$
21,578
|
$
7,887
|
|
Accounts
with stock exchanges
|
21,062
|
10,507
|
|
Current accounts
with commercial banks
|
17,689
|
6,656
|
|
Current
accounts in clearing organizations
|
14,088
|
5,887
|
|
Petty
cash in bank vault and on hand
|
6,802
|
2,674
|
|
Current account
with Central Bank (Russia)
|
5,948
|
2,161
|
|
Current
account with Central Depository (Kazakhstan)
|
2,834
|
2,693
|
|
Current
accounts with brokers
|
1,862
|
10,220
|
|
Current account
with National Settlement Depository (Russia)
|
1,790
|
1,275
|
|
Total
cash and cash equivalents
|
$
93,653
|
$
49,960
|
As of
December 31, 2019 and March 31, 2019, cash and cash equivalents
were not insured.
As of
December 31, 2019 and March 31, 2019, the cash and cash equivalents
balance included collateralized securities received under reverse
repurchase agreements on the terms presented below:
19
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
December 31,
2019
|
|||
|
|
Interest rates and remaining contractual maturity of the
agreements
|
|||
|
|
Average Interest rate
|
Up to 30 days
|
30-90 days
|
Total
|
|
Securities
purchased under reverse
repurchase
agreements
|
|
|
|
|
|
Corporate
equity
|
12.95
%
|
$
20,006
|
$
-
|
$
20,006
|
|
Non-US sovereign
debt
|
9.96
%
|
1,336
|
-
|
1,336
|
|
Corporate
debt
|
10.50
%
|
236
|
-
|
236
|
|
Total
|
|
$
21,578
|
$
-
|
$
21,578
|
|
|
March 31,
2019
|
|||
|
|
Interest rates and remaining contractual maturity of the
agreements
|
|||
|
|
Average Interest rate
|
Up to 30 days
|
30-90 days
|
Total
|
|
Securities
purchased under reverse
repurchase
agreements
|
|
|
|
|
|
Corporate
equity
|
11.90
%
|
$
4,328
|
$
804
|
$
5,132
|
|
Corporate
debt
|
14.00
%
|
120
|
-
|
120
|
|
Non-U.S. sovereign
debt
|
8.25
%
|
2,635
|
-
|
2,635
|
|
Total
|
|
$
7,083
|
$
804
|
$
7,887
|
The securities received by the Company as collateral under reverse
repurchase agreements are liquid trading securities with market
quotes and significant trading volume. The fair value of collateral
received by the Company under reverse repurchase agreements as of
December 31, 2019 and
March 31, 2019, was $23,600 and $8,472,
respectively.
NOTE 4 – RESTRICTED CASH
As of
December 31, 2019 and March 31, 2019, the Company’s
restricted cash consisted of the cash portion of the funds
allocated for deferred distribution payments, cash segregated in a
special custody account for the exclusive benefit of our brokerage
customers and required reserves with the Central Bank of the
Russian Federation which represents cash on hand balance
requirements. In June 2019 the Company invested a portion of the
deferred distribution payments into certain financial instruments.
For additional information regarding that portion of the funds held
for deferred distribution payments that have been invested into
certain financial instruments, see Note 5 - Trading and
Available-For-Sale Securities at Fair Value.
20
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
Restricted
cash consisted of:
|
|
December
31,
2019
|
March
31,
2019
|
|
|
|
|
|
Brokerage
customers’ cash
|
$
43,495
|
$
28,931
|
|
Guaranty
deposits
|
4,642
|
732
|
|
Deferred
distribution payments
|
1,053
|
8,534
|
|
Reserve with
Central Bank of Russia
|
536
|
263
|
|
Total
restricted cash
|
$
49,726
|
$
38,460
|
NOTE 5 – TRADING AND AVAILABLE-FOR-SALE SECURITIES AT FAIR
VALUE
As of
December 31, 2019 and March 31, 2019, trading and
available-for-sale securities consisted of:
|
|
December 31,
2019
|
March 31,
2019
|
|
|
|
|
|
Debt
securities
|
$
85,233
|
$
62,691
|
|
Equity
securities
|
78,912
|
105,017
|
|
Mutual investment
funds
|
-
|
241
|
|
Total
trading securities
|
$
164,145
|
$
167,949
|
|
|
|
|
|
Certificates
of deposit
|
$
6,018
|
$
-
|
|
Mutual
investment funds
|
696
|
-
|
|
Debt
securities
|
455
|
-
|
|
Preferred
shares
|
312
|
-
|
|
Equity
securities
|
2
|
2
|
|
Total
available-for-sale securities, at fair value
|
$
7,483
|
$
2
|
The
Company recognized no other-than-temporary impairment in
accumulated other comprehensive income.
The
fair value of assets and liabilities is determined using observable
market data based on recent trading activity. Where observable
market data is unavailable due to a lack of trading activity, the
Company utilizes internally developed models to estimate fair value
and independent third parties to validate assumptions, when
appropriate. Estimating fair value requires significant management
judgment, including benchmarking to similar instruments with
observable market data and applying appropriate discounts that
reflect differences between the securities that the Company is
valuing and the selected benchmark. Depending on the type of
securities owned by the Company, other valuation methodologies may
be required.
Measurement
of fair value is classified within a hierarchy based upon the
transparency of inputs used in the valuation of an asset or
liability. Classification within the hierarchy is based upon the
lowest level of input that is significant to the fair value
measurement.
The
valuation hierarchy contains three levels:
●
Level 1 - Valuation
inputs are unadjusted quoted market prices for identical assets or
liabilities in active markets.
●
Level 2 - Valuation
inputs are quoted market prices for identical assets or liabilities
in markets that are not active, quoted market prices for similar
assets and liabilities in active markets, and other observable
inputs directly or indirectly related to the asset or liability
being measured.
●
Level 3 - Valuation
inputs are unobservable and significant to the fair value
measurement.
21
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
The
following tables present trading and available-for-sale securities
assets in the condensed consolidated
financial
statements at fair value on a recurring basis as
of December 31, 2019 and March 31, 2019:
|
|
|
Fair Value Measurements at
|
||
|
|
|
December 31, 2019 using
|
||
|
|
|
Quoted Prices in
Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant Unobservable
Inputs
|
|
|
December 31
, 2019
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|
|
|
|
|
|
|
Debt
securities
|
$
85,233
|
$
85,233
|
$
-
|
$
-
|
|
Equity
securities
|
78,912
|
68,446
|
-
|
10,466
|
|
Total
trading securities
|
$
164,145
|
$
153,679
|
$
-
|
$
10,466
|
|
|
|
|
|
|
|
Certificates
of deposit
|
$
6,018
|
$
-
|
$
6,018
|
$
-
|
|
Mutual
investment funds
|
696
|
696
|
-
|
-
|
|
Debt
securities
|
455
|
-
|
455
|
-
|
|
Preferred
shares
|
312
|
-
|
312
|
-
|
|
Equity
securities
|
2
|
-
|
-
|
2
|
|
Total
available-for-sale securities, at fair value
|
$
7,483
|
$
696
|
$
6,785
|
$
2
|
|
|
|
Fair Value
Measurements at
March 31, 2019
using
|
||
|
|
|
Quoted Prices in
Active Markets for Identical Assets
|
Significant
Other Observable Inputs
|
Significant
Unobservable Inputs
|
|
|
March
31,
2019
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
|
|
|
|
|
|
|
Equity
securities
|
$
105,017
|
$
105,017
|
$
-
|
$
-
|
|
Debt
securities
|
62,691
|
62,187
|
-
|
504
|
|
Mutual investment
funds
|
241
|
241
|
-
|
-
|
|
Total
trading securities
|
$
167,949
|
$
167,445
|
$
-
|
$
504
|
|
|
|
|
|
|
|
Equity
securities
|
$
2
|
$
-
|
$
-
|
$
2
|
|
Total
available-for-sale securities, at fair value
|
$
2
|
$
-
|
$
-
|
$
2
|
22
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
The
table below presents the Valuation Techniques and Significant Level
3 Inputs used in the valuation as of December 31, 2019 and March
31, 2019. The table is not intended to be all inclusive, but
instead captures the significant unobservable inputs relevant to
determination of fair value.
|
Type
|
Valuation
Technique
|
FV as
of
December
31,
2019
|
FV as
of
March
31,
2019
|
Significant
Unobservable Inputs
|
Input
|
|
|
|
|
|
|
|
|
Corporate
bonds
|
DCF
|
$
-
|
$
504
|
Discount
rate
|
11.3
%
|
|
Equity
security
|
DCF
|
10,466
|
-
|
Discount
rate
|
9.8
%
|
|
|
|
|
|
Estimated number of
years
|
9 years
|
The
following table provides a reconciliation of the beginning and
ending balances for investments that use Level 3 inputs for the
nine months ended December 31, 2019:
|
|
Trading
securities
|
Available for
sale securities
|
|
Balance
as of March 31, 2019
|
$
504
|
$
2
|
|
|
|
|
|
Sale of investments
that use Level 3 inputs
|
(497
)
|
-
|
|
Purchase of
investments that use Level 3 inputs
|
10,430
|
-
|
|
Foreign currency
translation
|
29
|
-
|
|
Balance
as of December 31, 2019
|
$
10,466
|
$
2
|
23
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
|
December 31,
2019
|
|
|
|
Assets measured
at amortized cost
|
Unrealized gain
accumulated in other comprehensive
income/(loss)
|
Assets measured at fair value
|
|
|
|
|
|
|
Certificates
of deposit
|
$
6,005
|
$
13
|
$
6,018
|
|
Mutual
investment funds
|
691
|
5
|
696
|
|
Debt
securities
|
455
|
-
|
455
|
|
Preferred
shares
|
304
|
8
|
312
|
|
Equity
securities
|
2
|
-
|
2
|
|
Available-for-sale
securities, at fair value
|
$
7,457
|
$
26
|
$
7,483
|
|
|
|
March
31,
2019
|
|
|
|
Assets measured
at amortized cost
|
Unrealized gain
accumulated in other comprehensive
income/(loss)
|
Assets measured at fair value
|
|
|
|
|
|
|
Equity
securities
|
$
1
|
$
1
|
$
2
|
|
|
|
|
|
|
Available-for-sale
securities, at fair value
|
$
1
|
$
1
|
$
2
|
Of the
available-for-sale securities, at fair value, the total amount less
the amount of Equity securities, together with the amount
identified as “deferred distribution payments” in Note
4 – Restricted Cash is held as a reserve for distribution to
shareholders who have not yet claimed their distributions from the
2011 sale of the Company’s oil and gas exploration and
production operations. These funds are currently payable, subject
to the entitled shareholders completing and submitting to the
Company the necessary documentation to claim his, her or its
distribution payments. The Company has no control over when, or if,
any entitled shareholder will submit the necessary documentation to
claim his, her, or its distribution payment.
NOTE 6 – BROKERAGE AND OTHER RECEIVABLES, NET
|
|
December 31,
2019
|
March
31,
2019
|
|
|
|
|
|
Margin lending
receivables
|
$
155,058
|
$
46,716
|
|
Receivables from
brokerage clients
|
1,175
|
824
|
|
Receivables from
sale of securities
|
1,037
|
27,684
|
|
Bank commissions
receivable
|
74
|
-
|
|
Receivable for
underwriting and market-making services
|
65
|
-
|
|
Dividends
accrued
|
1
|
108
|
|
Other
receivables
|
47
|
130
|
|
|
|
|
|
Allowance for
receivables
|
(240
)
|
(1,626
)
|
|
Total
brokerage and other receivables, net
|
$
157,217
|
$
73,836
|
24
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
On
December 31, 2019 and March 31, 2019, amounts due from a single
related party customer were $135,414 and $31,792, respectively or
86% and 43%, respectively of total brokerage and other receivables,
net. Based on experience, the Company considers receivables due
from related parties as fully collectible. As of December 31, 2019
and March 31, 2019, using historical and statistical data, the
Company recorded an allowance for brokerage receivables in the
amount of $240 and $1,626, respectively.
NOTE 7 – LOANS ISSUED
Loans
issued as of December 31, 2019, consisted of the
following:
|
|
Amount
Outstanding
|
Due
Dates
|
Average Interest
Rate
|
Fair Value of
Collateral
|
Loan
Currency
|
|
Subordinated
loan
|
$
5,023
|
Dec. 2022 - Apr.
2024
|
4.89
%
|
$
-
|
USD
|
|
Uncollateralized
non-bank loan
|
3,101
|
Sep.
2020
|
2.00
%
|
-
|
USD
|
|
Subordinated
loan
|
1,568
|
Sep.
2029
|
12.00
%
|
-
|
UAH
|
|
Bank customer
loans
|
578
|
Jul. 2020 - May
2044
|
13.10
%
|
324
|
RUB
|
|
Uncollateralized
non-bank loan
|
505
|
Nov.
2020
|
6.50
%
|
-
|
RUB
|
|
|
$
10,775
|
|
|
$
324
|
|
Loans
issued as of March 31, 2019, consisted of the
following:
|
|
Amount
Outstanding
|
Due
Dates
|
Average Interest
Rate
|
Fair Value of
Collateral
|
Loan
Currency
|
|
|
|
|
|
|
|
|
Collateralized
brokerage loans
|
$
1,888
|
Dec.
2019
|
4.75
%
|
$
4,718
|
USD
|
|
Bank customer
loans
|
637
|
May 2019 –
Jan. 2039
|
13.34
%
|
-
|
RUB
|
|
|
$
2,525
|
|
|
$
4,718
|
|
NOTE 8 – DEFERRED TAX ASSETS
The
Company is subject to taxation in the Russian Federation,
Kazakhstan, Kyrgyzstan, Cyprus, Ukraine, Uzbekistan, Germany and
the United States of America.
The tax rates used
for deferred tax assets and liabilities as of December 31, 2019 and
March 31, 2019 is
21%
for the U.S.,
20%
for
the Russian Federation and Kazakhstan,
31%
for Germany,
12.5%
for Cyprus,
18%
for Ukraine,
12%
for
Uzbekistan and
10%
for
Kyrgyzstan.
Deferred
tax assets and liabilities of the Company are comprised of the
following:
25
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
December 31,
2019
|
March 31,
2019
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
Tax losses
carryforward
|
$
2,246
|
$
2,376
|
|
Revaluation on
trading securities
|
-
|
2,095
|
|
Accrued
liabilities
|
75
|
35
|
|
Valuation
allowance
|
(1,538
)
|
(3,241
)
|
|
Deferred tax assets
|
$
783
|
$
1,265
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
Revaluation on
trading securities
|
$
502
|
$
-
|
|
|
|
|
|
Deferred tax liabilities
|
$
502
|
$
-
|
|
|
|
|
|
Net deferred tax assets
|
$
281
|
$
1,265
|
During
the nine months ended December 31, 2019 and 2018, the
Company’s effective tax rate was equal to 17.03% and 19.09%,
respectively.
NOTE 9 – SECURITIES SOLD, NOT YET PURCHASED – AT FAIR
VALUE
As of
December 31, 2019 and March 31, 2019, the Company’s
securities sold, not yet purchased – at fair value was $4,385
and $0, respectively.
During
the nine months ended December 31, 2019, the Company sold shares
received as a pledge under reverse repurchase agreements and
recognized relevant financial liabilities at fair value in the
amount of $3,073 and closed short positions in the amount of $3,052
by purchasing securities from third parties, reducing its financial
liability. During the nine months ended December 31, 2019, the
Company recognized a gain on the change in fair value of financial
liabilities at fair value in the Condensed Consolidated Statements
of Operations and Statements of Other Comprehensive Income/(Loss)
in the amount of $21 with no foreign exchange translation
gain/(loss).
During
the nine months ended December 31, 2019, the Company sold shares
that are not owned by the Company and recognized relevant financial
liabilities at fair value in the amount of $3,550. During the nine
months ended December 31, 2019, the Company recognized a loss on
the change in fair value of financial liabilities at fair value in
the Condensed Consolidated Statements of Operations and Statements
of Other Comprehensive Income/(Loss) in the amount of $835 with no
foreign exchange translation gain/(loss).
A short
sale involves the sale of a security that is not owned by the
seller in the expectation of the seller purchasing the same
security (or a security exchangeable) at a later date at a lower
price. A short sale involves the risk of a theoretically unlimited
increase in the market price of the security that would result in a
theoretically unlimited loss.
26
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
NOTE 10 – LOANS RECEIVED
Loans
received as of December 31, 2019, consisted of the
following:
|
Borrower
|
Lender
|
December 31, 2019
|
March 31, 2019
|
Interest rate
|
Term
|
Maturity
date
|
|
Freedom Holding Corp
.
|
Non-Bank
|
$
-
|
$
3,917
|
3
%
|
1-2
years
|
April, 2019 -
December, 2019
|
|
Freedom Finance
Cyprus Limited
|
Non-Bank
|
-
|
91
|
1
%
|
2
years
|
November,
2019
|
|
Total
|
|
$
-
|
$
4,008
|
|
|
|
Non-bank
loans received are unsecured. As of December 31, 2019 and March 31,
2019, accrued interest on the loans totaled $0 and $52,
respectively.
NOTE 11 – DEBT SECURITIES ISSUED
|
|
December
31,
2019
|
March
31,
2019
|
|
|
|
|
|
Debt securities
issued denominated in USD
|
$
30,630
|
$
20,265
|
|
Debt securities
issued denominated in RUB
|
8,077
|
7,724
|
|
Accrued
interest
|
443
|
549
|
|
Total
|
$
39,150
|
$
28,538
|
As of
December 31, 2019, and March 31, 2019, the Company had debt
securities issued in the amount of $39,150 and $28,538
respectively. As of December 31, 2019, the Company’s
outstanding debt securities had fixed annual coupon rates ranging
from 7% to 12% and maturity dates ranging from June 2020 to
December 2022. The Company’s debt securities include bonds of
Freedom KZ and RU issued under Kazakhstani and Russian Federation
law, which trade on the Kazakhstan Stock Exchange and the Moscow
Exchange, respectively. The Company’s debt securities also
include $14,500 in the aggregate amount of notes of FRHC issued in
December 2019. The FRHC issued notes, denominated in USD, have
minimum denominations of $100,000, bear interest at an annual rate
of 7% and are due in 2022. The FRHC notes were sold only in
Kazakhstan to non-U.S. persons in compliance with Astana
International Financial Centre law and trade on the Astana
International Exchange.
Debt
securities issued are initially recognized at the fair value of the
consideration received, less directly attributable transaction
costs. Debt securities issued as of December 31, 2019 and March 31,
2019 included $443 and $549 of accrued interest,
respectively.
NOTE 12 – CUSTOMER LIABILITIES
The
Company recognizes customer liabilities associated with funds held
by our brokerage and bank customers. Customer liabilities consist
of:
27
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
December
31,
2019
|
March
31,
2019
|
|
|
|
|
|
Brokerage
customers
|
$
126,974
|
$
47,686
|
|
Banking
customers
|
65,780
|
34,346
|
|
Total
|
$
192,754
|
$
82,032
|
As of
December 31, 2019, banking customer liabilities consisted of
current accounts and deposits of $42,297 and $23,483, respectively.
As of March 31, 2019, banking customer liabilities consisted of
current accounts and deposits of $12,383 and $21,963,
respectively.
NOTE 13 – TRADE PAYABLES
|
|
December
31,
2019
|
March
31,
2019
|
|
|
|
|
|
Margin lending
payable
|
$
41,823
|
$
29,081
|
|
Trade payable for
securities purchased
|
13,499
|
2,939
|
|
Payables to
suppliers of goods and services
|
343
|
555
|
|
Coupons
payable
|
283
|
-
|
|
Other
payables
|
182
|
120
|
|
Total
|
$
56,130
|
$
32,695
|
On
December 31, 2019 and March 31, 2019, trade payables due to a
single related party were $3,850 or 7% and $938 or 3%,
respectively.
NOTE 14 – SECURITIES REPURCHASE AGREEMENT
OBLIGATIONS
As of
December 31, 2019 and March 31, 2019, trading securities included
collateralized securities subject to repurchase agreements as
described in the following table:
|
|
December 31, 2019
|
||||
|
|
Interest rates and remaining contractual maturity of the
agreements
|
||||
|
|
Average interest rate
|
Up to 30
days
|
30-90
days
|
Over 90
days
|
Total
|
|
Securities sold under
repurchase agreements
|
|
|
|
|
|
|
Corporate
equity
|
12.30
%
|
$
25,271
|
$
-
|
$
-
|
$
25,271
|
|
Corporate
debt
|
10.34
%
|
18,298
|
-
|
-
|
18,298
|
|
Non-U.S. sovereign
debt
|
9.69
%
|
14,306
|
-
|
-
|
14,306
|
|
Total
securities sold under
repurchase
agreements
|
|
$
57,875
|
$
-
|
$
-
|
$
57,875
|
28
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
March 31, 2019
|
||||
|
|
Interest rate and remaining contractual maturity of the
agreements
|
||||
|
|
Average interest rate
|
Up to 30
days
|
30-90
days
|
Over 90
days
|
Total
|
|
|
|
|
|
|
|
|
Securities sold under
repurchase agreements
|
|
|
|
|
|
|
Corporate
equity
|
12.06
%
|
$
49,048
|
$
-
|
$
2,146
|
$
51,194
|
|
Corporate
debt
|
10.38
%
|
13,548
|
-
|
-
|
13,548
|
|
Non-U.S. sovereign
debt
|
8.62
%
|
8,879
|
-
|
-
|
8,879
|
|
Total
securities sold under
repurchase
agreements
|
|
$
71,475
|
$
-
|
$
2,146
|
$
73,621
|
The
fair value of collateral pledged under repurchase agreements as of
December 31, 2019 and March 31, 2019, was $72,861 and $105,842,
respectively.
Securities
pledged as collateral by the Company under repurchase agreements
are liquid trading securities with market quotes and significant
trading volume.
NOTE 15 – RELATED PARTY TRANSACTIONS
During the three months ended December 31, 2019 and 2018, the
Company earned commission income from related parties in the amount
of $17,067 and $11,101 respectively. During the nine months ended
December 31, 2019 and 2018, the Company earned commission income
from related parties in the amount of $60,241 and $26,723,
respectively. Commission income earned from related parties is
comprised primarily of brokerage commissions, margin fees, and
commissions for money transfers by brokerage clients.
During the three months ended December 31, 2019 and 2018, the
Company paid commission expense to related parties in the amount of
$536 and $0, respectively. During the nine months ended December
31, 2019 and 2018, the Company paid commission expense to related
parties in the amount of $2,931 and $0, respectively.
As of December 31, 2019 and
March 31
, 2019, the Company had cash and cash equivalents
held in brokerage accounts of related parties totaling $196 and
$8,444, respectively.
As of December 31, 2019 and March 31, 2019, the Company had loans
issued to related parties totaling $0 and $1,888,
respectively.
As of December 31, 2019 and March 31, 2019, the Company had margin
lending receivables with related parties totaling $152,795 and
$43,720, respectively.
As of December 31, 2019 and March 31, 2019, the Company had margin
lending payables to related parties, totaling $3,850 and $1,090,
respectively.
As of December 31, 2019 and March 31, 2019, the Company had loans
received from a related party totaling $0 and $3,957,
respectively.
As of December 31, 2019 and March 31, 2019, the Company had
accounts payable due to a related party totaling $307 and $345,
respectively.
29
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
As of December 31, 2019 and March 31, 2019, the Company had
consideration due to a related party for the Nettrader acquisition
totaling $2,787 and $2,590, respectively.
As of December 31, 2019 and March 31, 2019, the Company had
customer liabilities on brokerage accounts and bank accounts of
related parties totaling $28,729 and $29,904, respectively and held
restricted customer cash on brokerage accounts of related parties
totaling $10,823 and $13,999, respectively.
In
August 2019, to comply with certain foreign ownership restrictions
relating to registered Ukrainian broker-dealers, the Company sold
67.12% of the outstanding equity interest of Freedom UA to Askar
Tashtitov, the Company’s president, for $100. The Company
retained the remaining 32.88% of the outstanding equity interests
in Freedom UA. In connection with this transaction, the Company
also entered into a series of contractual arrangements with Freedom
UA and Mr. Tashtitov, including a consulting services agreement, an
operating agreement and an option agreement. For additional
information regarding this transaction, see Note 1 –
Description of Business.
NOTE 16 – STOCKHOLDERS’ EQUITY
During
the nine months ended December 31, 2019, nonqualified stock options
to purchase 230,000 shares were exercised at a strike price of
$1.98 per share for total proceeds of $455. No stock options were
exercised during the nine months ended December 31,
2018.
During
the nine months ended December 31, 2019 and 2018, shareholders made
capital contributions of $0 and $245 to FRHC,
respectively.
On
October 6, 2017, the Company awarded restricted stock grants
totalling 3,900,000 shares of its common stock to 16 employees and
awarded nonqualified stock options to purchase an aggregate of
360,000 shares of its common stock to two employees. Of the
3,900,000 shares awarded pursuant to the restricted stock grant
awards, 1,200,000 shares are subject to two-year vesting conditions
and 2,700,000 shares are subject to three-year vesting conditions.
All of the nonqualified stock options are subject to three-year
vesting conditions. The Company recorded stock-based compensation
expense for restricted stock grants and stock options in the amount
of $546 and $2,100 during the three and nine months ended December
31, 2019. The Company recorded stock-based compensation expense for
restricted stock grants and stock options in the amount of $847 and
$2,533 during the three and nine months ended December 31, 2018
respectively.
NOTE 17 – STOCK BASED COMPENSATION
During
the nine months ended December 31, 2019, no stock options were
granted. Total compensation expense related to options granted was
$54 for the three months ended December 31, 2019, and $54 for the
three months ended December 31, 2018. Total compensation expense
related to options granted was $162 for the nine months ended
December 31, 2019, and $162 for the nine months ended December 31,
2018. As of December 31, 2019, there was total remaining
compensation expense of $165 related to stock options, which will
be recorded over a weighted average period of approximately 0.77
years. During the nine months ended December 31, 2019, options to
purchase a total of 230,000 shares were exercised.
30
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
As
disclosed in Note 16, on October 6, 2017, the Company issued
restricted stock awards totaling 3,900,000 shares of its common
stock to 16 employees and awarded nonqualified stock options to
purchase an aggregate of 360,000 shares of its common stock at a
strike price of $1.98 per share to two employees. Shares of
restricted stock have the same dividend and voting rights as common
stock while options do not. All awards were issued at the fair
value of the underlying shares at the grant date.
The
Company has determined the fair value of such stock options using
the Black-Scholes option valuation model based on the following key
assumptions:
|
Vesting period
(years)
|
3
|
|
Volatility
|
165.33
%
|
|
Risk-free
rate
|
1.66
%
|
Stock-based
compensation expense for the cost of the awards granted is based on
the grant-date fair value. For stock option awards, the fair value
is estimated at the date of grant using the Black-Scholes
option-pricing model. This model requires the input of highly
subjective assumptions, changes to which can materially affect the
fair value estimate. Additionally, there may be other factors that
would otherwise have a significant effect on the value of employee
stock options granted but are not considered by the model.
Accordingly, while management believes that the Black-Scholes
option-pricing model provides a reasonable estimate of fair value,
the model does not necessarily provide the best single measure of
fair value for the Company’s employee stock
options.
The
following is a summary of stock option activity for the nine months
ended December 31, 2019:
|
|
Shares
|
Weighted Average Exercise Price
|
Weighted
Average Remaining Contractual Term
(In Years)
|
Aggregate
Intrinsic Value
|
|
Outstanding, March
31, 2019
|
350,000
|
$
1.98
|
8.52
|
$
2,342
|
|
Granted
|
-
|
-
|
-
|
-
|
|
Exercised
|
(230,000
)
|
1.98
|
-
|
2,630
|
|
Forfeited/cancelled/expired
|
-
|
-
|
-
|
-
|
|
Outstanding, at
December 31, 2019
|
120,000
|
$
1.98
|
7.77
|
$
1,507
|
|
Exercisable,
at December 31, 2019
|
-
|
$
-
|
-
|
$
-
|
31
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
During
the three and nine months ended December 31, 2019, no restricted
shares were awarded. The compensation expense related to restricted
stock grants was $492 during the three months ended December 31,
2019, and $793 during the three months ended December 31, 2018. The
compensation expense related to restricted stock grants was $1,938
during the nine months ended December 31, 2019, and $2,731 during
the nine months ended December 31, 2018. As of December 31, 2019,
there was $1,448 of total unrecognized compensation cost related to
non-vested shares of restricted stock granted. The cost is expected
to be recognized over a weighted average period of 0.77
years.
The
table below summarizes the activity for the Company’s
restricted stock outstanding during the nine months ended December
31, 2019:
|
|
Shares
|
Weighted Average Fair
Value
|
|
Outstanding,
March 31, 2019
|
2,275,000
|
$
4,777
|
|
Granted
|
-
|
-
|
|
Vested
|
-
|
-
|
|
Forfeited/cancelled/expired
|
-
|
-
|
|
Outstanding,
at December 31, 2019
|
2,275,000
|
$
4,777
|
During
the nine months ended December 31, 2019, the Company recorded
expenses for share based payments for consulting services in the
amount of $836.
NOTE 18 – LEASES
The
Company determines whether a contract is or contains a lease at
inception of the contract and whether that lease meets the
classification criteria of a finance or operating lease. When
available, the Company uses the rate implicit in the lease to
discount lease payments to present value; however, most of the
Company’s leases do not provide a readily determinable
implicit rate. Therefore, the Company must discount lease payments
based on an estimate of its incremental borrowing
rate.
The
Company leases its corporate office space and certain facilities
under long-term operating leases expiring through fiscal year 2024.
Effective April 1, 2019, the Company adopted the provision of ASC
842 Leases.
The
table below presents the lease related assets and liabilities
recorded on the Company’s consolidated balance sheets as of
December 31, 2019:
32
FREEDOM HOLDING CORP.
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(
Unaudited)
(All amounts in thousands of United States dollars, unless
otherwise stated)
|
|
Classification on Balance Sheet
|
December 31, 2019
|
|
Assets
|
|
|
|
Operating
lease assets
|
Right-of-use
assets
|
$
15,748
|
|
Total lease assets
|
|
$
15,748
|
|
|
|
|
|
Liabilities
|
|
|
|
Operating
lease liability
|
Operating
lease obligations
|
$
17,270
|
|
Total lease liability
|
$
17,270
|
|
Lease
obligations at March 31, 2019, consisted of the
following:
|
Twelve
months ending March 31,
|
|
|
2020
– remainder
|
$
1,554
|
|
2021
|
6,828
|
|
2022
|
6,317
|
|
2023
|
4,645
|
|
2024
|
1,102
|
|
2025
|
238
|
|
Total
payments
|
20,684
|
|
Less:
amounts representing interest
|
(3,414
)
|
|
Lease
obligation, net
|
$
17,270
|
|
Weighted
average remaining lease term (in months)
|
31
|
|
Weighted
average discount rate
|
12
%
|
Lease
commitments for short-term operating lease as of December 31, 2019
are approximately $413. The Company’s rent expense for office
space was $688 and $977 for the three and nine months ended
December 31, 2019 and $1,474 and $3,692 for the three and nine
months ended December 31, 2018, respectively.
NOTE 19 – SUBSEQUENT EVENTS
The
Company has performed an evaluation of subsequent events through
the time of filing this quarterly report on Form 10-Q with the SEC.
During this period the Company did not have any additional material
recognizable subsequent events.
33
Item 2.
M
anagement’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion is intended to assist you in understanding our
results of operations and our present financial condition. Our
unaudited condensed consolidated financial statements and the
accompanying notes included in this Quarterly Report on Form 10-Q
contain additional information that should be referred to when
reviewing this material and this document should be read in
conjunction with our financial statements and the related notes
contained elsewhere in this report and in our other filings with
the U.S. Securities and Exchange Commission (the
“Commission”) including our annual report on Form 10-K
filed with the Commission on June 14, 2019.
Special Note About Forward-Looking Information
Certain
information included herein and the documents incorporated by
reference in this document, if any, contain statements that may be
considered forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, and are based on
management’s current expectations, that involve risks and
uncertainties that could cause our results to differ materially
from our current expectations. These forward-looking statements can
be identified by the use of forward-looking terminology such as
“anticipate,” “believe,”
“estimate,” “expect,” “intend,”
“plan,” “project,” “potential,”
and similar expressions, including the negatives of these terms.
Our actual results could differ materially from the results
contemplated by these forward-looking statements and are subject to
a number of risks, uncertainties, estimates and assumptions that
may cause actual results to differ materially from current
expectations due to a number of factors, including, but not limited
to: (i) the ability of our current management to effectively
execute our business strategy; (ii) our capability to compete with
financial services companies that have greater experience,
financial resources and competitive advantages in the markets where
we operate; (iii) our CEO and Chairman owns the controlling
interest in our common stock and therefore has the ability to
direct our business with his reasonable business judgment without
approval of other shareholders; (iv) our capacity to comply with
the extensive, pervasive and ever evolving legal, regulatory and
oversight requirements in a number of jurisdictions, the failure of
which could subject us to penalties, regulatory action, and could
even prevent us from conducting business in such jurisdictions; (v)
volatility in the capital markets, currency fluctuations and
general economic conditions; (vi) our ability to attract and retain
key management and other properly licensed and experienced
personnel to satisfy applicable regulatory standards and operate
our business profitably; (vii) our ability to properly manage the
market, leverage and customer risks that arise from our proprietary
trading; and (viii) such other risks as set forth elsewhere in this
report, as well as in our Annual Report on Form 10-K for the fiscal
year ended March 31, 2019. We assume no obligation to revise or
update any forward-looking statements for any reason, except as
required by law.
Available Information
You may
review a copy of this Quarterly Report on Form 10-Q on the
Commission’s website, www.sec.gov, that contains reports,
proxy and information statements and other information regarding
registrants, such as Freedom Holding Corp, that file electronically
with the Commission. Copies of our periodic reports, proxy and
information statements also are available from our investor
relations website, https://ir.freedomholdingcorp.com. We intend to
use our investor relations website,
https://irfreedomholdingcorp.com, as a means for disclosing
material non-public information and for complying with Commission
Regulation FD and other disclosure obligations. Information
contained in or linked from our websites is not incorporated into
and does not constitute a part of this report.
34
Overview
We own
several operating subsidiaries that provide financial services
including full-service retail securities brokerage, investment
education, securities trading, investment banking and market making
activities in Eastern Europe and Central Asia. We are headquartered
in Almaty, Kazakhstan, with supporting administrative offices in
Russia, Cyprus and the United States.
Our
subsidiaries are participants of the Kazakhstan Stock Exchange
(KASE), the Astana International Exchange (AIX), the Moscow Stock
Exchange (MOEX), the Saint-Petersburg Stock Exchange (SPBX), the
Ukrainian Exchange (UX), and the Republican Stock Exchange of
Tashkent (UZSE). Our Cyprus office provides our clients with
operations support and access to the investment opportunities,
relative stability, and integrity of the U.S. and European
securities markets, which under the regulatory regimes in a number
of jurisdictions where we operate do not currently allow investors
direct access to international securities markets.
In several
jurisdictions in which we operate, investors cannot easily access
international securities markets.
Our
business is directed toward providing an array of financial
services to our target retail audience which is upper middle class
individuals and businesses seeking access to the largest most
liquid financial markets in the world and to diversify their
investment portfolios to manage economic risk associated with
political, regulatory, currency, banking, and national
uncertainties. Clients are provided online tools and retail
locations to establish accounts and conduct securities trading on
transaction-based pricing. We market to our customer demographic
through a number of channels, including telemarketing, training
seminars and investment conferences, print and online advertising
using social media, our mobile app and search engine optimization
activities.
Executive Summary
Customer Base
We
serviced more than 133,000 client accounts of which more than 50%
carried positive cash or asset account balances as of December 31,
2019. For the three months ended December 31, 2019, we had
approximately 37,000 active accounts. Internally, we designate
“active accounts” as those in which one transaction
occurs per quarter.
35
During
fiscal 2019 we made several strategic acquisitions which enabled us
to expand our market reach and provide our clientele the
convenience of both a state-of-the-art proprietary electronic
trading platform, Tradernet, and 75 retail brokerage and financial
services offices located across Kazakhstan (16), Kyrgyzstan (1),
Russia (34), Uzbekistan (8), Ukraine (13), Cyprus (1) and Germany
(1) that provide an array of financial services, investment
consulting and education. In Russia 17 of our brokerage and
financial services offices also provide banking services to firm
customers. During fiscal 2020 we have been focused on client
acquisition through expanded marketing and sales efforts designed
to attract new clients, increase account size of existing clients
and enhance consumer confidence in the Freedom Finance brand. We
have also explored client acquisition through strategic partnering
opportunities with large banks and other market participants.
Expansion through continued business acquisition will continue to
be a part of our overall growth strategy.
Significant Events
Our
common stock was uplisted from the OTCQX Best Market and began
trading on the Nasdaq Capital Market on October 15,
2019.
On
October 22, 2019, we announced that our common stock had also been
approved for listing on the Saint-Petersburg Stock
Exchange.
In
December 2019 we placed $14.5 million of FRHC 7.000% notes due
December 2022 with accredited investors in Kazakhstan in accordance
with and governed by the laws of the Astana International Financial
Centre (“AIFC”). We realized net proceeds of $14.4
million. The notes were issued in denominations of U.S $100,000,
with interest payable semi-annually in June and December. The
aggregate principal amount of the FRHC notes is U.S.$50 million.
The Notes include customary events of default relating to
disposition of Company assets outside the ordinary course of
business, defaults on Company liabilities and obligations,
corporate reorganizations, initiation of bankruptcy proceeding,
termination of the AIX listing by the Company, and substitution of
the principal debtor without requisite approval. The FRHC notes
were not registered under the United States Securities Act of 1933,
as amended (the “Securities Act”) and were offered and
sold pursuant to and in accordance with the exemption from
registration in the United States provided under Regulation S. The
FRHC notes were not offered or sold in the United States or to, or
for the account or benefit of U.S. persons. The FRHC notes are
listed on the Astana International Exchange (“AIX”).
Subsequent to the quarter end, in January 2020, we placed an
additional $1 million of FRHC notes. The Astana International
Exchange Registrar Limited acts as the registrar for the FRHC
notes. The Terms and Conditions governing the FRHC notes is
attached as Exhibit 4.01 to this quarterly report on Form 10-Q and
is incorporated herein by this reference.
In December 2019 we
acquired approximately a 13% interest in the Saint-Petersburg
Exchange Joint-Stock Company, which owns the Saint-Petersburg Stock
Exchange (“SPBX”) for approximately $10.5 million. The
SPBX is one of the oldest Russian exchanges. It is the third most
active stock exchange in Russia by volume, and the largest Russian
exchange outside of Moscow. In November 2014 the SPBX started
trading in the securities of certain S&P 500 Index listed
companies and enables local private investors access to certain
U.S. securities. In June 2019 the SPBX announced that the exchange
trades in nearly 1,000 American shares, depository receipts and
bonds. We believe our association with the SPBX will allow us to
attract more customers interested in investing in the U.S. capital
markets.
Financial Results
During
the three months ended December 31, 2019, we realized net income of
approximately $4 million and basic and diluted earnings per share
of $0.07. During the nine months ended December 31, 2019, net
income totaled approximately $20.9 million and basic and diluted
earnings per share were $0.36. As a result of strengthening of our
functional currencies against our reporting currency and the
resulting foreign currency translation adjustment, net of tax, we
realized a gain on foreign currency translation adjustments of
approximately $2.8 million and $1.4 million, respectively, during
the three and nine months ended December 31, 2019, resulting in
comprehensive income before noncontrolling interests of
approximately $6.9 million and $22.3 million, respectively, during
the three and nine months ended December 31, 2019.
All dollar amounts reflected under the headings “Results of
Operations,” “Liquidity and Capital Resources,”
and “Cash Flows” in this Management’s Discussion
and Analysis of Financial Condition and Results of Operations are
presented in thousands of U.S. dollars unless the context indicates
otherwise.
36
Results of Operations
Three months ended December 31, 2019 compared to the three months
ended December 31, 2018
The
following quarter-to-quarter comparison of our financial results is
not necessarily indicative of future results.
|
|
Three Months Ended December 31, 2019
|
Three Months Ended December 31, 2018
|
||
|
|
Amount
|
%*
|
Amount
|
%*
|
|
Revenues:
|
|
|
|
|
|
Fee
and commission income
|
$
20,583
|
70
%
|
$
12,274
|
47
%
|
|
Net gain on trading
securities
|
6,448
|
22
%
|
11,641
|
44
%
|
|
Interest
income
|
3,063
|
10
%
|
2,976
|
11
%
|
|
Net loss on foreign
exchange operations
|
(1,080
)
|
(4
%)
|
(498
)
|
(2
%)
|
|
Net gain on
derivatives
|
556
|
2
%
|
-
|
-
|
|
Total
revenue, net
|
29,570
|
100
%
|
26,393
|
100
%
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Interest
expense
|
3,167
|
11
%
|
3,180
|
12
%
|
|
Fee
and commission expense
|
5,525
|
19
%
|
1,422
|
5
%
|
|
Operating
expense
|
16,608
|
56
%
|
12,117
|
46
%
|
|
Provision/(recovery)
for impairment losses
|
152
|
1
%
|
243
|
1
%
|
|
Other expense,
net
|
118
|
0
%
|
(14
)
|
0
%
|
|
Total
expense
|
25,570
|
87
%
|
16,948
|
64
%
|
|
|
|
|
|
|
|
Net income before
income taxes
|
4,000
|
14
%
|
9,445
|
36
%
|
|
Income tax
benefit/(expense)
|
50
|
(0
%)
|
(545
)
|
(2
%)
|
|
Net income
|
$
4,050
|
14
%
|
$
8,900
|
34
%
|
|
Less:
Net loss attributable to noncontrolling interest in
subsidiary
|
(991
)
|
(3
%)
|
-
|
-
|
|
Net income attributable to common shareholders
|
$
5,041
|
17
%
|
$
8,900
|
34
%
|
|
|
|
|
|
|
|
Other
comprehensive income
|
|
|
|
|
|
Change
in unrealized gain on available-for-sale, net of tax
effect
|
$
(1
)
|
0
%
|
$
-
|
-
|
|
Foreign
currency translation adjustments, net of tax effect
|
2,841
|
10
%
|
(5,596
)
|
(21
%)
|
|
Comprehensive income before noncontrolling interests
|
$
6,890
|
23
%
|
$
3,304
|
13
%
|
|
Less:
comprehensive loss attributable to noncontrolling interest in
subsidiary
|
(991
)
|
(3
%)
|
-
|
-
|
|
Comprehensive income attributable to common
shareholders
|
$
7,881
|
27
%
|
$
3,304
|
13
%
|
*
Reflects percentage of total
revenues, net.
Revenue
We
derive revenue primarily from gains realized from fee and
commission income earned from our retail brokerage clients,
underwriting and market making activities, our proprietary trading
activities, and interest income.
37
|
|
Three
Months Ended
December
31, 2019
|
Three
Months Ended
December
31, 2018
|
Change
|
|||
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|
Fee and commission
income
|
$
20,583
|
70
%
|
$
12,274
|
47
%
|
$
8,309
|
68
%
|
|
Net gain on trading
securities
|
6,448
|
22
%
|
11,641
|
44
%
|
(5,193
)
|
(45
%)
|
|
Interest
income
|
3,063
|
10
%
|
2,976
|
11
%
|
87
|
3
%
|
|
Net
loss on foreign exchange operations
|
(1,080
)
|
(4
)%
|
(498
)
|
(2
%)
|
(582
)
|
117
%
|
|
Net
gain on derivatives
|
556
|
2
%
|
-
|
-
|
556
|
0
%
|
|
Total revenue, net
|
$
29,570
|
100
%
|
$
26,393
|
100
%
|
$
3,177
|
12
%
|
During the three months ended December 31, 2019
and 2018, we realized total net revenue of $29,570 and $26,393,
respectively. Revenue during the three months ended December 31,
2019, was significantly higher than the three months ended December
31, 2018, primarily due to increased fee and commission
income
,
increased interest income and
increased net gain on derivatives. The gains realized during the
three months ended December 31, 2019, were partially offset by a
decrease in net gain on trading securities and an increase in net
loss on foreign exchange operations.
Fee and commission income.
Fee and
commission income consisted principally of broker fees from
customer trading and related banking services, underwriting and
market making services. During the three months ended December 31,
2019 and 2018, fees and commissions generated from brokerage and
related banking services were $20,583 and $12,274, respectively an
increase of $8,309.
During
the three months ended December 31, 2019, fees and commissions from
brokerage services increased $7,636 as compared to the three months
ended December 31, 2018. During the three months ended December 31,
2019, the number of clients we serviced was higher as a result of
our efforts during our 2019 fiscal year to enlarge our branch
office network via acquisitions and internal growth, to increase
the number of our retail financial advisers, to expand the volume
of analysts’ reports available to our customer base and to
grow the trading activity of our existing customers. Fees and
commissions realized from underwriting and market making services
increased by $969 during the three months ended December 31, 2019,
due to us engaging in more underwriting and market making
activities compared to the three months ended December 31, 2018.
The increase in fee and commission income was partially offset by
lower banking service fees during the three months ended December
31, 2019 by $296 compared to the three months ended December 31,
2018. Fees for bank services consist primarily of wire transfer
fees, commissions for payment processing and commissions for
currency exchange operations.
38
Net gain on trading
securities.
Net gain on
trading securities reflects the gains and losses from trading
activities in our proprietary trading accounts. Net gains or losses
are comprised of realized and unrealized gains and losses. Gains or
losses are realized when we close a position in a security and
realize a gain or a loss on that position. U.S. GAAP requires that
we reflect in our financial statements unrealized gains and losses
on all our securities trading positions that remain open as of the
end of each period. Fluctuations in unrealized gains or losses from
one period to another may result from factors within our control,
such as when we elect to close an open securities position, which
would have the effect of reducing our open positions and, thereby
potentially reducing or increasing the amount of unrealized gains
or losses in a period. Fluctuations in unrealized gains and losses
from period to period may also occur as a result of factors beyond
our control, such as fluctuations in the market prices of the open
securities positions we hold. This may adversely affect the
ultimate value we realize from these investments. Unrealized gains
or losses in a particular period may or may not be indicative of
the gain or loss we will realize on a securities position when the
position is closed. As a result, we may realize significant swings
in gains and losses realized on our trading securities
year-over-year and quarter-over-quarter. You should not assume that
a gain or loss in any particular period is indicative of a trend or
of the gain or loss we may ultimately realize when we close a
position.
During
the three months ended December 31, 2019, we recognized a net gain
on trading securities of $6,448 which included $11,452 of realized
net gain and $5,004 of unrealized net loss compared to a net gain
of $11,641 on trading securities for three months ended December
31, 2018, which included $7,523 of realized net gain and $4,118 of
unrealized net gain. The primary contributing factors to the
decrease in our net gain on trading securities during three months
ended December 31, 2019, was the reduction in the size of
proprietary trading positions we held during the three months ended
December 31, 2019, as compared to the prior period, and the fact
that several securities held in our proprietary portfolio
experienced decreases in share price during the three months ended
December 31, 2019.
Interest
income
. During the three
months ended December 31, 2019 and 2018, we recorded interest
income from several sources: interest income on trading
securities, interest income on cash and cash equivalents held
in financial institutions, interest income on reverse repurchase
transactions and amounts due from banks. Interest income on trading
securities consists of interest earned from investments in debt
securities and dividends earned on equity securities held in our
proprietary trading accounts. During the three months ended
December 31, 2019, we realized interest income of $3,063 compared
to $2,976 for the three months ended December 31, 2018. The
increase in interest income of $87 was the result of an increase in
interest from reverse repurchase agreements in the amount of $462,
which was partially offset by decreased interest income on trading
securities in the amount of $257, loans to customers in the amount
of $86 and due from banks in the amount of $32.
During
the three months ended December 31, 2019, we realized lower
interest income from trading securities because we decreased our
investments in interest bearing securities as compared to the three
months ended December 31, 2018. This decrease was partially offset
by increased interest income from reverse repurchase transactions
during the three months ended December 31, 2019, because we
increased the volume of reverse repurchase transactions as compared
to the three months ended December 31, 2018.
Net loss on foreign exchange
operations
. Net loss on foreign
exchange operations resulted from revaluation of assets and
liabilities denominated in currencies other than our reporting
currency. During the three months ended December 31, 2019, we
realized a net loss on foreign exchange operations of $1,080
compared to a net loss of $498 during the three months ended
December 31, 2018. In accordance with U.S. GAAP, we are required to
revalue assets denominated in foreign currencies into our reporting
currency, which is the U.S. dollar.
39
During
the three months ended December 31, 2019, the values of the
Kazakhstani tenge and Russian ruble appreciated approximately 2%
and 4% against the United States dollar, respectively. As a result
of an increase in Kazakhstani tenge denominated financial
liabilities, coupled with the aforementioned appreciation in value
of the Kazakhstani tenge against the United States dollar, we
realized a $393 loss on foreign exchange revaluations. In addition,
we realized negative revaluation of Freedom RU’s assets
expressed in United States dollars in the amount of $404 as a
result of the Russian ruble strengthening against the United States
dollar. We also realized a loss on foreign exchange operations of
$139 due to a higher volume of cash and non-cash foreign exchange
operations executed by the Bank.
Expense
|
|
Three Months Ended
December 31, 2019
|
Three Months Ended
December 31, 2018
|
Change
|
|||
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|
Interest
expense
|
$
3,167
|
12
%
|
$
3,180
|
19
%
|
$
(13
)
|
0
%
|
|
Fee and commission
expense
|
5,525
|
22
%
|
1,422
|
8
%
|
4,103
|
289
%
|
|
Operating
expense
|
16,608
|
65
%
|
12,117
|
72
%
|
4,491
|
37
%
|
|
Provision/(recovery)
for
impairment
losses
|
152
|
1
%
|
243
|
1
%
|
(91
)
|
(37
%)
|
|
Other
expense/(income), net
|
118
|
0
%
|
(14
)
|
0
%
|
132
|
(943
%)
|
|
Total expense, net
|
$
25,570
|
100
%
|
$
16,948
|
100
%
|
$
8,622
|
51
%
|
During
the three months ended December 31, 2019 and 2018, we incurred
total expenses of $25,570 and $16,948, respectively. Expenses
during the three months ended December 31, 2019, increased
primarily as a result of our continued efforts to grow our
business.
Interest expense.
During the three
months ended December 31, 2019, we recognized total interest
expense of $3,167, compared to $3,180 during the three months ended
December 31, 2018. The decrease in interest expense of $13 was
primarily attributable to a decrease in interest expense for direct
repurchase transactions totaling $481, interest expense for
customer deposits received totaling $105, and interest expense for
loans received totaling $33. This decrease was partially offset by
increased interest expense related to the issuance of debt
securities totaling $145. Also, on April 1, 2019, we adopted the
new lease standard promulgated by FASB which resulted in our
recognition of interest expense in the amount of $461 during the
three months ended December 31, 2019, compared to $0 during the
three months ended December 31, 2018.
Fee and commission expense.
During the
three months ended December 31, 2019, we recognized fee and
commission expense of $5,525 compared to fee and commission expense
of $1,422 during the three months ended December 31, 2018. The
increase was associated with higher commission fees paid to the
Central Depository, stock exchanges and brokerage fees to our prime
brokers totaling $4,009 as well as an increase in bank services
commissions of $94. The increases in fee and commission expense
were the result of both growth in our client base and increased
transaction volume from our existing clients.
40
Operating
expense.
During the three
months ended December 31, 2019, operating expenses totaled $16,608
compared to $12,117 during the three months ended December 31,
2018. The increase was primarily attributable to higher general and
administrative expenses related to the expansion of our operations
and the growth of our branch office network, including a $2,577
increase in payroll expenses, a $1,166 increase in advertising
expense, a $468 increase in professional services, a $299 increase
in depreciation and amortization and a $249 increase in business
travel expenses. During the same period, we realized a $387
decrease in repairs, a $301 decrease in stock compensation expense
and a $193 decrease in inventory write-off expense. As a result of
adopting the new lease standard, the Company realized a $636
decrease in rent expenses and a $1,171 increase in lease
depreciation expenses.
Income tax benefit/(expense)
We
recognized net income before income tax of $4,000 and $9,445 during
the three months ended December 31, 2019 and 2018, respectively.
During the three months ended December 31, 2019, we realized an
income tax benefit of $50 compared to income tax expense of $545
during the three months ended December 31, 2018, as a result of
revisions of U.S. state taxes of non-U.S. earnings and changes in
the composition of the revenues we realized from our operating
activities and the tax treatment of those revenues in the various
foreign jurisdictions where our subsidiaries operate along with the
incremental U.S. tax on Global Intangible Low-taxed Income
(“GILTI”).
Comprehensive income/(loss) before noncontrolling
interests
The
functional currencies of our operating subsidiaries are the Russian
ruble, Kazakhstani tenge, European euro, Ukrainian hryvnia and
Uzbekistani sum. Our reporting currency is the United States
dollar. Pursuant to U.S. GAAP we are required to revalue our assets
from our functional currencies to our reporting currency for
financial reporting purposes. As a result of strengthening of
the Kazakhstani tenge and Russian ruble by approximately
2% and 4%, respectively, against the U.S. dollar we realized a
foreign currency translation gain of $2,841 during the three months
ended December 31, 2019. In comparison, as a result of
depreciation of the Russian ruble by 6% and the Kazakhstani tenge
by 6% against the U.S. dollar during the three months ended
December 31, 2018, we realized a foreign currency translation
loss of $5,596. During the three months ended December 31, 2019, we
realized comprehensive income before noncontrolling interests of
$6,890 compared to comprehensive income before noncontrolling
interests of $3,304 during the three months ended December 31,
2018.
Results of Operations
Nine months ended December 31, 2019 compared to the nine months
ended December 31, 2018
The
following period-to-period comparison of our financial results is
not necessarily indicative of future results.
41
|
|
Nine months Ended December 31, 2019
|
Nine months Ended December 31, 2018
|
||
|
|
Amount
|
%*
|
Amount
|
%*
|
|
Revenues:
|
|
|
|
|
|
Fee
and commission income
|
$
69,538
|
76
%
|
$
31,033
|
60
%
|
|
Net gain on trading
securities
|
12,957
|
14
%
|
12,669
|
24
%
|
|
Interest
income
|
8,999
|
10
%
|
11,823
|
23
%
|
|
Net loss on foreign
exchange operations
|
(241
)
|
(1
%)
|
(3,746
)
|
(7
%)
|
|
Net gain on
derivatives
|
556
|
1
%
|
-
|
-
|
|
Total
revenue, net
|
91,809
|
100
%
|
51,779
|
100
%
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
Interest
expense
|
9,976
|
11
%
|
11,471
|
22
%
|
|
Fee
and commission expense
|
14,068
|
15
%
|
3,155
|
6
%
|
|
Operating
expense
|
43,214
|
47
%
|
31,272
|
60
%
|
|
Provision/(recovery)
for impairment losses
|
(1,316
)
|
(1
%)
|
358
|
1
%
|
|
Other
expense/(income), net
|
675
|
1
%
|
223
|
0
%
|
|
Net loss on
disposal of subsidiary
|
-
|
-
|
15
|
0
%
|
|
Total
expense
|
66,617
|
73
%
|
46,494
|
89
%
|
|
|
|
|
|
|
|
Net income before
income taxes
|
25,192
|
27
%
|
5,285
|
10
%
|
|
Income tax
expense
|
(4,292
)
|
(5
%)
|
(1,009
)
|
(2
%)
|
|
Net income
|
$
20,900
|
22
%
|
$
4,276
|
8
%
|
|
|
|
|
|
|
|
Less:
Net loss attributable to noncontrolling interest in
subsidiary
|
(1,120
)
|
(1
%)
|
-
|
-
|
|
Net income attributable to common shareholders
|
$
22,020
|
24
%
|
$
4,276
|
8
%
|
|
|
|
|
|
|
|
Other
comprehensive income/(loss)
|
|
|
|
|
|
Change
in unrealized gain on available-for-sale securities, net of tax
effect
|
$
26
|
0
%
|
$
-
|
-
|
|
Reclassification
adjustment relating to available-for-sale securities disposed of in
the period, net of tax effect
|
-
|
-
|
22
|
0
%
|
|
Foreign
currency translation adjustments, net of tax
|
1,408
|
2
%
|
(17,836
)
|
(34
%)
|
|
Comprehensive income/(loss) before noncontrolling
interests
|
$
22,334
|
24
%
|
$
(13,538
)
|
(26
%)
|
|
Less:
comprehensive loss attributable to noncontrolling interest in
subsidiary
|
(1,120
)
|
(1
%)
|
-
|
-
|
|
Comprehensive income/(loss) attributable to common
shareholders
|
$
23,454
|
26
%
|
$
(13,538
)
|
(26
%)
|
*
Reflects percentage of total
revenues, net.
42
Revenue
We
derive revenue primarily from gains realized from fee and
commission income earned from our retail brokerage clients,
underwriting and market making activities, our proprietary trading
activities, and interest income.
|
|
Nine
Months Ended
December
31, 2019
|
Nine
Months Ended
December
31, 2018
|
Change
|
|||
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|
Fee and commission
income
|
$
69,538
|
76
%
|
$
31,033
|
60
%
|
$
38,505
|
124
%
|
|
Net gain on trading
securities
|
12,957
|
14
%
|
12,669
|
24
%
|
288
|
2
%
|
|
Interest
income
|
8,999
|
10
%
|
11,823
|
23
%
|
(2,824
)
|
(24
%)
|
|
Net
(loss) on foreign exchange operations
|
(241
)
|
(1
%)
|
(3,746
)
|
(7
%)
|
3,505
|
94
%
|
|
Net
gain on derivatives
|
556
|
1
%
|
-
|
-
|
556
|
0
%
|
|
Total revenue, net
|
$
91,809
|
100
%
|
$
51,779
|
100
%
|
$
40,030
|
77
%
|
During the nine months ended December 31, 2019 and
2018, we realized total net revenue of $91,809 and
$51,779
,
respectively. Revenue during the nine
months ended December 31, 2019, was significantly higher than the
nine months ended December 31, 2018, primarily due to increased fee
and commission income, higher net gain on trading
securities
,
decreased net loss on foreign exchange
operations
,
and increased net gain on derivatives,
which were only partially offset by a decrease in interest
income.
Fee and commission income.
Fee and
commission income consisted principally of broker fees from
customer trading and related banking services, underwriting and
market making services. During the nine months ended December 31,
2019 and 2018, fees and commissions generated from brokerage and
related banking services were $69,538 and $31,033, respectively, an
increase of $38,505.
During
the nine months ended December 31, 2019, fees and commissions from
brokerage services increased by $35,688 as compared to the nine
months ended December 31, 2018. During the nine months ended
December 31, 2019, the number of clients we serviced was higher as
a result of our efforts during our 2019 fiscal year to enlarge our
branch office network via acquisitions and internal growth, to
increase the number of our retail financial advisers, to expand the
volume of analysts’ reports available to our customer base
and to grow trading activity by our existing customers. Fees and
commissions from our related banking services increased during the
nine months ended December 31, 2019 by $1,153 compared to the nine
months ended December 31, 2018. Fees for bank services consist
primarily of wire transfer fees, commissions for payment processing
and commissions for currency exchange operations. Fees and
commissions realized from underwriting and market making services
increased by $1,664 during the nine months ended December 31, 2019,
due to our engaging in more underwriting and market making
activities compared to the nine months ended December 31,
2018.
43
Net gain on trading
securities.
Net gain on
trading securities reflects the gains and losses from trading
activities in our proprietary trading accounts. Net gains or losses
are comprised of realized and unrealized gains and losses. Gains or
losses are realized when we close a position in a security and
realize a gain or a loss on that position. U.S. GAAP requires that
we reflect in our financial statements unrealized gains and losses
on all our securities trading positions that remain open as of the
end of each period. Fluctuations in unrealized gains or losses from
one period to another may result from factors within our control,
such as when we elect to close an open securities position, which
would have the effect of reducing our open positions and, thereby
potentially reducing or increasing the amount of unrealized gains
or losses in a period. Fluctuations in unrealized gains and losses
from period to period may also occur as a result of factors beyond
our control, such as fluctuations in the market prices of the open
securities positions we hold. This may adversely affect the
ultimate value we realize from these investments. Unrealized gains
or losses in a particular period may or may not be indicative of
the gain or loss we will realize on a securities position when the
position is closed. As a result, we may realize significant swings
in gains and losses realized on our trading securities
year-over-year and quarter-over-quarter. You should not assume that
a gain or loss in any particular period is indicative of a trend or
of the gain or loss we may ultimately realize when we close a
position.
During
the nine months ended December 31, 2019, we recognized a net gain
on trading securities of $12,957 which included $18,208 of realized
net gain and $5,251 of unrealized net loss compared to a net gain
of $12,669 on trading securities for nine months ended December 31,
2018, which included $22,292 of realized net gain and $9,623 of
unrealized net loss. The primary contributing factor to our higher
net gain on trading securities during the nine months ended
December 31, 2019, was increases in the market prices of several
securities we held.
Interest
income
. During the nine
months ended December 31, 2019 and 2018, we recorded interest
income from several sources: interest income on trading
securities, interest income on cash and cash equivalents held
in financial institutions, interest income on reverse repurchase
transactions and amounts due from banks. Interest income on trading
securities consists of interest earned from investments in debt
securities and dividends earned on equity securities held in our
proprietary trading accounts. During the nine months ended December
31, 2019, we realized interest income of $8,999 compared to $11,823
for the nine months ended December 31, 2018. The decrease in
interest income of $2,824 was the result of several factors
including, decreased interest income on trading securities in the
amount of $1,957 and a $552 decrease in interest income from
reverse repurchase transactions, as well as a $268 decrease in
interest income from loans to customers and a $47 decrease in
interest due from banks.
During
the nine months ended December 31, 2019, we realized lower interest
income from trading securities because dividend income decreased as
compared to the nine months ended December 31, 2018. Interest
income from reverse repurchase transactions was lower during the
nine months ended December 31, 2019, because we decreased the
volume of reverse repurchase transactions as compared to the nine
months ended December 31, 2018.
44
Net
loss on foreign exchange operations
. Net losses on foreign
exchange operations result from revaluation of assets and
liabilities denominated in currencies other than our reporting
currency. During the nine months ended December 31, 2019, we
realized a net loss on foreign exchange operations of $241 compared
to a net loss of $3,746 during the nine months ended December 31,
2018. In accordance with U.S. GAAP, we are required to revalue
assets denominated in foreign currencies into our reporting
currency, which is the U.S. dollar.
During
the nine months ended December 31, 2019, the value of the
Kazakhstani tenge depreciated by approximately 1% against the
United States dollar, whereas the value of the Russian ruble
increased in value against the United States dollar by
approximately 4%. As a result of an increase in Kazakhstani tenge
denominated financial assets, coupled with the aforementioned
reduction in value of the Kazakhstani tenge against the United
States dollar, we realized a $151 loss on foreign exchange
revaluations. We also realized a loss on revaluation of corporate
bonds indexed to United States dollars issued by Freedom KZ in the
amount of $93.
Expense
|
|
Nine Months Ended
December 31, 2019
|
Nine Months Ended
December 31, 2018
|
Change
|
|||
|
|
Amount
|
%
|
Amount
|
%
|
Amount
|
%
|
|
Interest
expense
|
$
9,976
|
15
%
|
$
11,471
|
25
%
|
$
(1,495
)
|
(13
%)
|
|
Fee and commission
expense
|
14,068
|
21
%
|
3,155
|
7
%
|
10,913
|
346
%
|
|
Operating
expense
|
43,214
|
65
%
|
31,272
|
67
%
|
11,942
|
38
%
|
|
Provision/(recovery)
for
impairment
losses
|
(1,316
)
|
(2
)%
|
358
|
1
%
|
(1,674
)
|
(468
%)
|
|
Other
expense/(income), net
|
675
|
1
%
|
223
|
0
%
|
452
|
203
%
|
|
Net gain/loss on
disposal of subsidiary
|
-
|
-
|
15
|
0
%
|
(15
)
|
(100
%)
|
|
Total expense, net
|
$
66,617
|
100
%
|
$
46,494
|
100
%
|
$
20,123
|
43
%
|
During
the nine months ended December 31, 2019 and 2018, we incurred total
expenses of $66,617 and $46,494, respectively. Expenses during the
nine months ended December 31, 2019, increased primarily as a
result of our continued efforts to grow our business and were only
partially offset by lower interest expense and recovery for
impairment losses.
Interest expense.
During the nine
months ended December 31, 2019, we recognized total interest
expense of $9,976, compared to $11,471 during the nine months ended
December 31, 2018. The decrease in interest expense of $1,495 was
primarily attributable to a lower volume of short-term financing
attracted by means of securities repurchase agreements totaling
$3,022 and interest expense for loans received totaling $335. This
decrease was partially offset by increased interest expense for
customer accounts totaling $138 and increased interest expense
related to the issuance of debt securities totaling $348. Also, on
April 1, 2019, we adopted the new lease standard promulgated by
FASB which resulted in our recognition of interest expense in the
amount of $1,374 during the nine months ended December 31, 2019,
compared to $0 during the nine months ended December 31,
2018.
45
Fee and commission expense.
During the
nine months ended December 31, 2019, we recognized fee and
commission expense of $14,068 compared to fee and commission
expense of $3,155 during the nine months ended December 31, 2018.
The increase was associated with higher commission fees paid to the
Central Depository, stock exchanges and brokerage fees to our prime
brokers of $9,922 as well as an increase in bank services
commissions of $991. The increases in fee and commission expense
were the result of both growth in our client base and increased
transaction volume from our existing clients.
Operating expense.
During the nine
months ended September 2019, operating expenses totaled $43,124
compared to the operating expenses of $31,272 for the nine months
ended September 2018. This increase resulted primarily from an
$8,004 increase in payroll and bonus expense, a $2,198 increase in
professional services, a $1,002 increase in marketing and
advertising expenses, a $709 increase in depreciation and
amortization, a $555 increase in business travel expenses, a $275
increase in charity and a $226 increase in communication services,
which were partially offset by a $1,170 decrease in repairs, a $432
decrease in stock compensation expense and a $388 decrease in
inventory write-off expenses. As a result of adopting the new lease
standard, the Company realized a $2,507 decrease in rent expense
and a $3,322 increase in lease depreciation expense.
Provision/(recovery)for
impairment losses.
During the
nine months ended December 31, 2019, receivables in the amount
of approximately $17,945 were repaid, including $2,263 which
management had previously estimated may be uncollectible and for
which management had recognized an impairment loss in prior period.
This recovery was partially offset by an additional provision for
impairment losses in the amount of $928. We anticipate the
$2,263 recovery of impairment loss during the nine months ended
December 31, 2019, to be a one-time event that will not recur in
future periods.
Income tax expense
We
recognized net income before income tax of $25,192 during the nine
months ended December 31, 2019, and net income before income tax of
$5,285 during the nine months ended December 31, 2018. During the
nine months ended December 31, 2019, we realized income tax expense
of $4,292 compared to $1,009 during the nine months ended December
31, 2018, as a result of changes in the composition of the revenues
we realized from our operating activities and the tax treatment of
those revenues in the various foreign jurisdictions where our
subsidiaries operate along with the incremental U.S. tax on Global
Intangible Low-taxed Income (“GILTI”).
Comprehensive income/(loss) before noncontrolling
interests
The
functional currencies of our operating subsidiaries are the Russian
ruble, Kazakhstani tenge, European euro, Ukrainian hryvnia and
Uzbekistani sum. Our reporting currency is the United States
dollar. Pursuant to U.S. GAAP we are required to revalue our assets
from our functional currencies to our reporting currency for
financial reporting purposes. As a result of weakening of
the Kazakhstani tenge by 1% and Russian ruble
strengthening by 4% against the U.S. dollar we realized a foreign
currency translation gain of $1,408 during the nine months ended
December 31, 2019. In comparison, as a result of the
depreciation of the Russian ruble by 21% and the Kazakhstani tenge
by 14% against the U.S. dollar during the nine months ended
December 31, 2018 we realized a foreign currency translation
loss of $17,836. During the nine months ended December 31, 2019, we
realized comprehensive income before noncontrolling interests of
$22,334 compared to a comprehensive loss before noncontrolling
interests of $13,538 during the nine months ended December 31,
2018.
46
Liquidity and Capital Resources
Liquidity
is a measurement of our ability to meet our potential cash
requirements for general business purposes. Our operations are
funded through a combination of existing cash on hand, cash
generated from operations, proceeds from the issuance of common
stock, proceeds from the sale of bonds of our subsidiaries, our
credit facility and other borrowings. Regulatory requirements
applicable to our subsidiaries require each of them to maintain
minimum capital levels.
As
of December 31, 2019, we had cash and cash equivalents of $93,653
compared to cash and cash equivalents of $49,960, as of March 31,
2019. On December 31, 2019, we had total assets of $523,241 and
total liabilities of $381,330. By comparison, at March 31, 2019, we
had total assets of $350,911 and total liabilities of $233,314. At
December 31, 2019, we had net liquid assets of $425,210 consisting
of cash and cash equivalents, trading securities, brokerage and net
other receivables, other assets, and derivative assets compared to
$295,934 at March 31, 2019.
Currency
fluctuations during the periods discussed above led to
approximately a 4% increase in the value of the Russian ruble
against the U.S. dollar, while the Kazakhstani tenge decreased
approximately 1% against the U.S. dollar during the period from
March 31, 2019 to December 31, 2019. As a result, in accordance
with U.S. GAAP, balance sheet items denominated in Russian rubles
and Kazakhstani tenge had to be revalued. This caused us to realize
a $241 net loss on foreign exchange operations and a foreign
currency translation gain of $1,408 during the nine months ended
December 31, 2019.
As of
December 31, 2019, the value of the trading securities held in our
proprietary trading account totaled $164,145 compared to $167,949
at March 31, 2019. This decrease in trading securities was
primarily attributable to decreased market prices of several of the
proprietary positions we held. As of December 31, 2019, $72,861, or
44%, of the trading securities held in our proprietary trading
account were subject to securities repurchase obligations compared
to $101,124 or 60% as of March 31, 2019. Of the $93,653 in cash and
cash equivalents we held at December 31, 2019, $21,578, or
approximately 23%, were subject to reverse repurchase agreements.
By comparison, at March 31, 2019, we had cash and cash equivalents
of $49,960, of which $7,887, or 16%, were subject to reverse
repurchase agreements.
At December 31, 2019 and March 31, 2109, we had
outstanding debt securities totaling $39,150 and $28,538
respectively. Our outstanding debt securities at December 31, 2019
and March 31, 2019, included outstanding bonds of our subsidiaries
Freedom KZ and Freedom RU. These bonds have fixed annual coupon
rates ranging from 8% to 12% and maturity dates ranging from June
2020 to February 2022.
In December 2019, we placed $14.5
million of FRHC 7.000% notes due December 2022. The aggregate
principal amount of the FRHC notes is U.S.$50 million. We realized
net proceeds from the December placement of $14.4 million. Proceeds
from the FRHC note placement will be used for restructuring
corporate borrowing, general corporate purposes and financing of
business development initiatives.
47
As
registered broker-dealers and a bank, our subsidiaries are required
to satisfy minimum net capital requirements to maintain licensure
to conduct the brokerage and/or banking services we provide. These
minimum net capital requirements range from approximately $27 to
$19,168 and fluctuate depending on various factors. As of December
31, 2019, we had net assets of $141,911. In the event we fail to
maintain minimum net capital, we may be subject to fines and
penalties, suspension of operations, revocation of licensure and
disqualification of our management from working in the
industry.
We
monitor and manage our leverage and liquidity risk through various
committees and processes we have established. We assess our
leverage and liquidity risk based on considerations and assumptions
of market factors, as well as other factors, including the amount
of available liquid capital (i.e., the amount of their cash and
cash equivalents not invested in our operating business). While we
are confident in the risk monitoring and management processes we
have in place, a significant portion of our trading securities and
cash and cash equivalents are subject to collateralization
agreements. This significantly enhances our risk of loss in the
event financial markets move against our positions. When this
occurs our liquidity, capitalization and business can be negatively
impacted. Because of the amount of leverage we employ in our
proprietary trading activities, coupled with our strategy to at
times take large positions in select companies or industries, our
liquidity, capitalization, projected return on investment and
results of operations can be significantly affected when we
misjudge the impact of events, timing and liquidity of the markets
for those securities.
We have pursued an aggressive growth strategy
during the past several years, and we hope to continue to expand
the footprint of our financial services business in Eastern Europe
and Central Asia, as appropriate opportunities arise. While this
strategy has led to revenue growth it also results in increased
expenses and greater need for capital resources. Further growth and
e
xpansion may require
greater capital resources than we currently possess, which could
require us to pursue additional equity or debt financing from
outside sources. We cannot assure that such financing will be
available to us on acceptable terms, or at all, at the time it is
needed.
We believe that our current cash and cash equivalents, cash
expected to be generated from operating activities, and forecasted
returns from our proprietary trading will be sufficient to meet our
working capital needs for the next 12 months. We continue to
monitor our financial performance to ensure adequate liquidity to
fund operations and execute our business plan.
48
Cash Flows
The
following table presents our cash flows for the nine months ended
December 31, 2019 and 2018:
|
|
For the nine
months ended December 31, 2019
|
For the nine
months ended December 31, 2018
|
|
|
|
|
|
Net cash flows from
operating activities
|
$
68,645
|
$
45,879
|
|
Net cash flows used
in investing activities
|
(10,595
)
|
(6,048
)
|
|
Net cash flows used
in financing activities
|
(8,372
)
|
(48,808
)
|
|
Effect of changes
in foreign exchange rates on cash
and cash
equivalents
|
5,281
|
(10,188
)
|
|
|
|
|
|
NET CHANGE IN CASH,
CASH EQUIVALENTS, AND RESTRICTED CASH
|
$
54,959
|
$
(19,165
)
|
Net cash from operating activities during the nine
months December 31, 2019, was $68,645. By comparison, during the
nine months ended December 31, 2018, net cash from operating
activities was $45,879. Net cash from operating activities during
the nine months ended December 31, 2019, was driven by net
income
,
adjusted for non-cash movements
(depreciation and amortization, depreciation of lease asset,
non-cash stock compensation expense, unrealized loss on trading
securities,
unrealized gain on
derivative asset, allowance for receivables, net change in accrued
interest) and net cash from operating activities primarily from
changes in operating assets and liabilities, including a $105,560
increase in customer liabilities resulting from deposits from new
customers and increased deposits from existing customers and a
$22,069 increase in trade payables for margin
.
These changes were only partially
offset by $80,423 increase in brokerage and other receivable from
margin.
During
the nine months ended December 31, 2019, net cash used in investing
activities was $10,595 compared to $6,048 during the nine months
ended December 31, 2018. Cash used in investing activities during
the nine months ended December 31, 2019, was used for the purchase
of fixed assets, net of sales in the amount of $3,140 and to
purchase available-for-sale securities in the amount of $7,455.
Cash used in investing activities during the nine months ended
December 31, 2018, was primarily used for the acquisition of Asyl
Invest in the amount of $2,240 and for the purchase of fixed
assets, net of sales, in the amount of $4,043, which was partially
offset by cash received from the sale of available-for-sale
securities, at fair value of $235.
During
the nine months December 31, 2019, net cash used in financing
activities was $8,372 compared to $48,808 during the nine months
ended December 31, 2018. Net cash used in financing activities
during the nine months ended December 31, 2019, consisted
principally of securities repurchase agreement obligations in the
amount of $15,285 and repayment of loans received in the amount of
$4,008. This was offset by proceeds from the issuance debt
securities of FRHC and Freedom KZ and the repurchase of Freedom KZ
debt securities, resulting in net proceeds of $10,466 and from
proceeds from stock option exercises in the amount of $455. By
comparison, net cash flows used in financing activities during the
nine months ended December 31, 2018, consisted principally of
securities repurchase agreement obligations in the amount of
$65,238 and repayment of loans received in the amount of $2,528,
which was offset by proceeds from the issuance of debt securities
of Freedom KZ in the amount of $18,713 and capital contributions to
the Company in the amount of $225.
49
Contractual Obligations and Contingencies
Because
we are a smaller reporting company, we are not required to provide
the information required by this Item.
Off-Balance Sheet Financing Arrangements
As
of December 31, 2019, we had no off-balance sheet financing
arrangements.
Critical Accounting Policies and Estimates
For
a discussion of critical accounting policies and estimates, please
see Note 2 to our condensed consolidated financial
statements.
Item 3.
Q
ualitative and
Quantitative Disclosures about Market Risk
Because
we are a smaller reporting company, we are not required to provide
the information required by this Item.
Item 4.
C
ontrols and
Procedures
Evaluation of Disclosure Controls and Procedures
As of
end of the period covered by this quarterly report, our management,
under the supervision and with the participation of our principal
executive officer and principal financial officer, evaluated the
effectiveness of the design and operation of our disclosure
controls and procedures under the 2013 framework of the Committee
of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e)) our principal executive
officer and principal financial officer concluded that as of
December 31, 2019, our disclosure controls and procedures were
effective. Disclosure controls and procedures enable us to record,
process, summarize and report information required to be included
in our Exchange Act filings within the required time period. Our
disclosure controls and procedures include controls and procedures
designed to ensure that information required to be disclosed by us
in the periodic reports filed with the SEC is accumulated and
communicated to our management, including our principal executive,
financial and accounting officers, or persons performing similar
functions, as appropriate to allow timely decisions regarding
required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over
financial reporting during the three months ended
December
31
, 2019, that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
50
PART II - OTHER INFORMATION
Item 1.
L
egal
Proceedings
The
securities industry is highly regulated and many aspects of our
business involve substantial risk of liability. In recent years,
there has been an increasing incidence of litigation involving the
financial services industry, including class action suits that
generally seek substantial damages, including in some cases
punitive damages. Compliance and trading problems that are reported
to regulators, exchanges or other self-regulatory organizations by
dissatisfied customers are investigated by such regulatory bodies,
and, if pursued by such regulatory body or such customers, may rise
to the level of arbitration or disciplinary action. We are also
subject to periodic regulatory audits and inspections.
From
time to time our subsidiaries are party to various routine legal
proceedings, claims, and regulatory inquiries arising out of the
ordinary course of their business. Management believes that the
results of these routine legal proceedings, claims, and regulatory
matters will not have a material adverse effect on our financial
condition, or on our operations and cash flows. However, we cannot
estimate the legal fees and expenses to be incurred in connection
with these routine matters and, therefore, are unable to determine
whether future legal fees and expenses will have a material impact
on our operations and cash flows. It is our policy to expense legal
and other fees as incurred.
Item 1A.
R
isk Factors
We
believe there are no additions to the risk factors disclosed in our
annual report on Form 10-K for the year ended March 31, 2019, filed
with the Commission on June 14, 2019.
51
Item 6.
E
xhibits
Exhibits. The
following exhibits are filed or furnished, as applicable, as part
of this report:
|
Exhibit No.*
|
|
Description of Exhibit
|
|
Location
|
|
|
|
|
|
|
|
Item 4
|
|
Instruments Defining the Rights of Securities
Holders
|
|
|
|
|
Terms and
Conditions of FRHC 7.000% Interest Notes
due December
2022
|
|
Attached
|
|
|
Item 31
|
|
Rule
13a-14(a)/15d-14(a) Certifications
|
|
|
|
|
Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Attached
|
|
|
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
Attached
|
|
|
Item 32
|
|
Section 1350 Certifications
|
|
|
|
|
Certification
Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
|
|
Attached
|
|
|
Item 101
|
|
Interactive Data File
|
|
|
|
101
|
|
The
following Freedom Holding Corp, financial information for the
periods ended December 31, 2019, formatted in XBRL (eXtensive
Business Reporting Language): (i) the Condensed Consolidated
Balance Sheets, (ii) the Condensed Consolidated Statements of
Operations and Statements of Other Comprehensive Income, (iii) the
Condensed Consolidated Statements of Cash Flows, and (iv) the Notes
to the Unaudited Condensed Consolidated Financial
Statements.
|
|
Attached
|
*
All exhibits are
numbered with the number preceding the decimal indicating the
applicable SEC reference number in Item 601 and the number
following the decimal indicating the sequence of the particular
document.
52
S
IGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
|
|
|
FREEDOM
HOLDING CORP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
|
February 10, 2020
|
/s/
Timur Turlov
|
|
|
|
|
|
Timur
Turlov
Chief
Executive Officer
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
Date:
|
February 10, 2020
|
/s/
Evgeniy Ler
|
|
|
|
|
|
Evgeniy
Ler
Chief
Financial Officer
|
||
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TABLE OF CONTENTS
Note 1 Description Of BusinessprintNote 2 Summary Of Significant Accounting PoliciesprintNote 3 Cash and Cash EquivalentsprintNote 4 Restricted CashprintNote 5 Trading and Available-for-sale Securities At Fair ValueprintNote 6 Brokerage and Other Receivables, NetprintNote 7 Loans IssuedprintNote 8 Deferred Tax AssetsprintNote 9 Securities Sold, Not Yet Purchased At Fair ValueprintNote 10 Loans ReceivedprintNote 11 Debt Securities IssuedprintNote 12 Customer LiabilitiesprintNote 13 Trade PayablesprintNote 14 Securities Repurchase Agreement ObligationsprintNote 15 Related Party TransactionsprintNote 16 Stockholders EquityprintNote 17 Stock Based CompensationprintNote 18 LeasesprintNote 19 Subsequent EventsprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Qualitative and Quantitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II - Other InformationprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 6. ExhibitsprintItem 4 Instruments Defining The Rights Of Securities HoldersprintItem 31 Rule 13a-14(a)/15d-14(a) CertificationsprintItem 32 Section 1350 CertificationsprintItem 101 Interactive Data Fileprint